Foreign investors in Bajaj Finance stocks might face a significant tax hit after the company’s recent announcement of a bonus share issue and stock split. Bajaj Finance said it would offer four bonus shares for every one share (4:1) and also go for a stock split in the ratio 1:2. While this looks like a reward for investors, it could turn out to be a costly move for foreign investors due to the way capital gains tax is calculated in India.
What is the bonus and stock split about?
For the first time in 9 years, Bajaj Finance is giving bonus shares. In simple terms, bonus shares are extra shares offered to investors free of cost. On the other hand, a stock split means each share is split into smaller units to make them more affordable. While Indian investors may see this as a positive step, foreign investors could pay more taxes when they sell these new shares.
The issue with tax rules on bonus shares
According to Indian tax rules, especially after the Grandfathering Provision was introduced in 2018, investors who bought listed shares before January 31, 2018, can use the Fair Market Value (FMV) as the base price for Long Term Capital Gains (LTCG) tax. This helps reduce their tax burden because FMV is usually higher than the original purchase price.
However, this benefit does not apply to bonus shares. Since bonus shares are treated as a fresh allotment with zero acquisition cost, they do not get FMV protection. This means when foreign investors sell these bonus shares, the sale value is considered capital gains and taxed fully.
Bonus shares sold within a year attract higher taxes.
If an investor sells these bonus shares within one year of receiving them, they fall under Short-Term Capital Gains (STCG). In such cases, foreign investors will have to pay a 20% tax on the full sale amount, as there is no cost of acquisition counted for bonus shares.
The bonus shares are less beneficial for foreign investors than regular long-term investments where FMV rules apply.
Why foreign investors are worried
Tax professionals say this is not a new problem. Many investors, especially foreign ones, have earlier raised concerns about how bonus shares are taxed. Since the acquisition date is counted from the bonus share issue date, even if they hold the original shares for years, the bonus shares are seen as new assets. So, any sale within one year becomes taxable at short-term rates.
Suresh Swamy, partner at Price Waterhouse & LLP, explained that this creates an extra tax burden. Investors don’t get time-based benefits, and they also don’t get cost-related benefits because of the zero cost of acquisition.
How does this impact future investment decisions?
While the move by Bajaj Finance is good for increasing liquidity and shareholding base, foreign investors now have to be extra careful. They may delay selling these bonus shares or restructure their portfolios to manage the tax impact. This situation also highlights the need for possible changes in tax policy to ensure bonus shares don’t lead to unfair taxation for long-term investors.
Sources: Moneycontrol, Price Waterhouse & LLP
