Richest Indian Cuts Future Tax Bill With Reliance Revamp

  • Move could reduce potential tax liabilities: Maheshwari
  • India changed some tax rules on capital gains effective April

India’s richest man is looking at ways of insulating his family’s holdings in Reliance Industries Ltd. from the government’s efforts to tax some long-term capital gains, according to people with knowledge of the matter.

Mukesh Ambani’s plan to revamp his stake in the nation’s second most-valuable company, by transferring shares between entities affiliated with his family, is aimed at reducing their potential bill following changes in Indian levies, the people said, asking not to be identified discussing private matters. The move may help contain liabilities from the sales at about $45 million compared with nearly $4.5 billion if they were to do a similar deal after April 1 once the tax changes take effect, according to Bloomberg calculations.

Ambani owns 46.5 percent of Reliance via at least 55 entities related to him or members of his family. The revamp will contain the family’s tax liabilities should the founders sell stake at a later date. India will levy a 20 percent tax on the sale of certain shares held by individuals or limited liability partnerships from next month. A number of companies are weighing similar transactions to protect against future obligations, said Amit Maheshwari, a partner at accounting firm Ashok Maheshwary & Associates.

“Any prudent company would like to hedge its potential risks,” said Maheshwari. “This is merely a pre-emptive measure to avoid tax liabilities," on any transaction from April 1, he said.

Securities Tax

India currently levies no tax on gains from shares held for longer than a year by individuals or limited liability partnerships. Finance Minister Arun Jaitley in February announced a change to these rules beginning April 1. Entities, which didn’t pay the so-called securities transaction tax at the time of purchase, will be taxed as much as 20 percent on profits from the sale of these shares.

Fifteen firms affiliated to Ambani will transfer as many as 1.2 billion Reliance shares to eight firms, any time after March 8, the company said in an exchange filing last week. Both the buyers and sellers of Reliance’s shares, valued at about 1.5 trillion rupees as of Friday’s closing price, will pay the securities transaction tax of 0.1 percent of the value of the deal.

A Reliance Industries spokesman did not respond to an email and calls on his mobile seeking comment.

The entities participating in the planned Reliance transaction are part of the owner group, exempting it from rules under India’s takeover code that would trigger an open offer to minority stakeholders, according to the company’s filing. The purchase price will be the market price prevailing on the transaction date. However, it won’t exceed a 25 percent premium over 1,100.78 rupees a share, the weighted average market price for Reliance shares over the past 60 trading days.

Most companies involved have held Reliance shares for at least six years and acquired them at a nominal price, without paying any securities transaction tax, the people said. A sale after March 31 would mean a significant capital gain that would fall under the new tax rule.

The selling firms will each retain at least 100 shares of Reliance, according to data compiled by Bloomberg. Entities related to the Ambani family have carried out similar share transfers at least twice before, without changing the owners total shareholding.

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