Aurobindo Pharma's Reddy transfers holding to trustee company

FM Arun Jaitley has imposed a 10% tax on dividend income on shares held by trusts

Aurobindo Pharma founder P V Ramprasad Reddy, who together with his wife P Suneela Rani holds 36.64 per cent of the company's shares, last month initiated succession planning, which also doubles up as a tax planning move just before the imposition of a 10 per cent tax on dividend income from shares held by trusts.

On January 19, Suneela Rani transferred all the 196.37 million shares, 33.56 per cent of the total shareholding, to RPR Sons Advisors Private Limited, a trustee company of the family trust set up by Reddy.

Finance Minister Arun Jaitley has imposed a 10 per cent tax on dividend income on shares held by trusts to plug a loophole exploited by promoters of many large corporate groups who had transferred their shares to family trusts to avoid paying the dividend tax.

Reddy has now transferred the largest chunk of his promoter holding to a private limited company, which need not pay the dividend tax. Reddy himself holds 18 million shares, or 3.08 per cent, in Aurobindo Pharma.

"It was done as part of succession planning, which is being advised by EY. The shares have been transferred to RPR Sons Advisors Private Limited because a company need not pay the dividend tax. The decision to transfer the shares to the trustee company was also taken in view of the impending inheritance tax," an Aurobindo Pharma executive told Business Standard.

Reddy has two sons, Sharath and Rohit, and succession planning has been in the works for three years. RPR Sons Advisors Private Limited was incorporated as a trustee of the Reddy family trust in December 2014. Total promoter and promoter group holding comprises 51.94 per cent of the company’s shares. Other shareholders include Reddy’s brother-in-law K Nityananda Reddy, who is Aurobindo Pharma’s vice-chairman and whole time director with a 4.33 per cent shareholding in the drug company.

Having doubled his shareholding in Aurobindo Pharma since its IPO in 1995, Reddy transferred the majority of his holding to his wife in 2012. Reddy led the company as its executive chairman and now serves on the Aurobindo Pharma board as a non-executive director.

Reddy’s transfer of shares to a trustee company is seen as a clever move. The effective tax rate for promoters owning shares either in person, through Hindu undivided families or through family trusts works out to 36 per cent if the new 10 per cent dividend tax is taken into consideration.