ICICI Securities IPO: Public holidays may cost ICICI Bank Rs 3 bn in taxes

ICICI Bank has been successful in launching the initial public offering (IPO) of its investment banking arm, ICICI Securities, before the end of this financial year but there remains a question on whether the private lender will be able to get the benefit of the long-term capital gains (LTCG) tax exemption on profits made on the sale of equity shares.

ICICI Securities’ Rs 40-billion public offer will open on March 22 and close on March 26. The IPO allotment process — critical for computation of capital gains — takes another five working days to complete. Ideally, the payouts in case of ICICI Securities could have taken place before March 31 but two back-to-back public holidays might result in a spillover of transaction into the next financial year.

Currently, LTCG — profits made on the sale of equity shares held for over 12 months — are entirely exempt from taxes. But it will be taxed at 10 per cent, effective April 1.

The share sale is entirely an offer for sale by the parent. The IPO proceeds of Rs 40 billion are capital gains the private lender would be booking by divesting around 24 per cent stake in the investment banking arm.

“If the allotment process gets completed before March 31, ICICI Bank will get the tax benefit. However, if the process, mainly the payouts, happens on April 1 or later, the bank will have to pay capital gains tax on the issue proceeds,” said an investment banker handling the offer.

The timeline of a maiden offer — gap between closing of an IPO and listing of the securities — is six working days. The six-day process involves modification of bids, obtaining exchange approvals, finalisation of allotment, transfer of securities from an escrow to investors and transfer of funds from investors’ account to the issuers.

The bone of contention is public holidays on March 29 and March 30 on account of Mahavir Jayanti and Good Friday, respectively. 

As banks and exchanges would be shut, the allotment and the payouts could take place on April 3 and listing on April 5, back-of-the-envelope calculations show.

“Technically, the day the shares get transferred and allotment is made, will be considered as the day of transaction for tax purposes. The day of IPO closing or listing is not that important,” a tax lawyer said.

According to sources, investment banks are in talks with exchanges to process the application during public holidays so that the transaction can be concluded in the current financial year. But the bourses have not offered any clarity on whether this can be done, a source said, adding it will be “touch and go”.

While the bank wants to complete the deal in the ongoing fiscal year, it will have no option but to pay the tax if it spills over to the next year, sources said.

ICICI Bank will get Rs 40 billion from the share sale. The bank will have to pay 10 per cent of the proceeds after subtracting the cost of acquisition and indexation. The exact tax outgo could be as much as Rs 3 billion.

The private bank is selling 77.25 million shares of ICICI Securities in the IPO. According to an initial filing with the Securities and Exchange Board of India, the bank had planned to sell only 64.43 million shares. 

Industry players said ICICI Securities’ valuations had to be lowered by 20 per cent due to weak demand, which slightly delayed the offer process.