Block Conversion Of Shares Into Adr/Gdr To Get Tax Breaks

The government has decided to give preferential tax treatment to block conversion of domestic shares into American Depository Receipts and Global Depository Receipts (ADR/GDR).

The revenue department has issued the notification extending the benefit of a 10 per cent concessional capital gains tax to such block conversion (known as sponsored ADR/GDRs), utting them at par with other ADRs/GDRs. The RBI is expected to shortly issue the guidelines to make the scheme operational.

In the last few months, several top corporates including Reliance, Grasim and Ranbaxy had opted for block conversion of shares into ADRs instead of issuing fresh shares. While Ranbaxy has converted four lakh shares into an equivalent amount of GDR on the London Stock Exchange, 10 lakh shares of Reliance were converted into five lakh GDR on the Luxembourg stock exchange.

The move will further integrate the domestic markets with those abroad and also give fresh financial leverage to corporates picking up stake in disinvestment of public sector companies.

The guidelines would make no distinction between the conversion of PSU and private shares. Sponsored ADR/GDR are those wherein a promoter picks up a block of shares from the retail investors or otherwise and exchanges them to create ADR/GDR by routing them through the custodian.

The process has become possible as the government has allowed two-way fungibility i.e. conversion of ADRs/GDRs into their underlying domestic shares and vice versa.

The scheme was announced in the budget for 2001-02, but could not be operationalised till the fungibility route was opened in February 2002.

The process is also expected to deepen the capital market as it would promote arbitrage between them and the foreign markets. Government sources said the opening up of the route would help realise potentially higher valuation of domestic companies in international markets.

Currently, because of the long running bear phase in the bourses, the valuation of most companies are depressed, which has encouraged promoters to tap into the the foreign markets to earn a better value from their share capital.