Budget impact: Higher public float may not be tax-accretive for Centre

Higher weight in global indices, better price discovery, more control to minority shareholders, and windfall tax mobilisation on account of long-term capital gains (LTCG) booked by promoters, are among the benefits being talked about following the proposal to increase minimum public shareholding in listed firms to 35 per cent, from 25 per cent at present.

The higher float may end up benefitting minority shareholders. However, the move may not prove to be very tax-accretive for the government, at least at current stock prices.

An analysis of shareholding data shows that there are at least 1,110 listed companies with promoter holding of above 65 per cent. The promoter group will need to offload shares worth over Rs 3.4 trillion — at current market prices — in these companies, to achieve the proposed 35 per cent float.

Given that the tax on long-term capital gains (LTCG) is 10 per cent, one would expect tax mobilisation in excess of Rs 30,000 crore from the giant exercise involving share sales worth Rs 3.4 trillion. However, it could end up being just a fraction of it.

When LTCG was introduced last year, the government had provided the “grandfathering” benefit on gains made before January 31, 2018. That meant LTCG would be applicable on the difference between the actual share sale price and the closing price as on January 31, 2018.

Interestingly, of the 1,100 companies that may have to increase their float, the share prices of only 140 are above their January 31 closing price, at present.

After applying the grandfathering benefit, the LTCG on the proposed share sale works out to just Rs 5,900 crore — less than 2 per cent of the total share sale.

To be sure, increasing the public float from 25 per cent to 35 per cent is just a proposal as of now. Even if it gets approved, the implementation would be spread across at least two years, which could change the LTCG calculations in case stock prices rally significantly from their current levels.

“According to our calculations, the tax gain for the government based on last week’s prices is Rs 9,000 crore, excluding the surcharge. However, the actual gain could be much more, as the higher float norms could come into effect two or three years from now,” said Deven Choksey, managing director of KR Choksey Investment Managers.  

The benchmark indices have come off by over 3 per cent since the Union Budget, with the broader markets underperforming during this period.

The capital markets regulator, Securities and Exchange Board of India, is soon expected to float a discussion paper seeking market feedback on the proposal to increase public float in listed companies.

Experts say the paper will cover aspects such as the benefits of higher float, possible complications surrounding the takeover code, and compliance timeframe.