Tata Motors DVR shares have been banned from trade on the stock markets. Sunday, September 1, is the record date for identifying the names of the holders of 'A' ordinary shares who are entitled to receive the new ordinary shares as consideration.
Tata Motors has set the conversion ratio at 10:7, which means seven fully paid-up new ordinary shares for every ten 'A' ordinary shares. The conversion will result in a 4% reduction in share capital. Tata Motors Ltd has formed an irrevocable determinate private trust, TML Securities Trust, with Axis Trustee Services acting as an Independent Trustee, to carry out the capital reduction strategy. Tata Motors would issue additional ordinary shares to this trust on behalf and in the interest of each of the 'A' ordinary shareholders.
In a capital reduction program, consideration in the form of new shares is regarded as a distribution of accumulated earnings to shareholders. This is based on Section 2(22)(d) of the Indian Income Tax Act, 1961. As a result, cumulative earnings as of the record date will be recognized as presumed dividends in the hands of shareholders and taxed at the appropriate tax rates (including slab rates for persons). This will also be subject to TDS.
DRChoksey FinServ Private Limited reported that Tata Motors has Rs 10,033 crore in standalone reserves. When compared to DVR shares of 51 crore, that equals Rs 200 per share. The Rs200 in reserves each DVR share would be recognized as a presumed dividend because they are being converted to ordinary shares, it stated.
There are three tax legs that apply to shareholders who receive ordinary shares in exchange for DVR shares. First, TML Securities Trust will pay TDS on the considered dividend on behalf of shareholders. The trust will pay the TDS by selling the ordinary shares distributed to stockholders in T+15 days after September 1. TDS will be claimed back by shareholders in their ITR using the certificate issued by TML Securities Trust.
TML Securities Trust will compensate STCG for selling shares. The net quantity after paying TDS to shareholders would be distributed proportionally.
To be clear, the presumed dividend of Rs 200 per share would be subject to a 10% TDS for resident and corporate shareholders, but mutual funds, AIFs, and insurance companies will be excluded, according to DRChoksey FinServ Private Limited.
TML will pay such TDS by founding the TML Securities Trust. The amount of TDS would have to be recovered by the said trust by selling between 0.60 and 0.80 crore ordinary shares, which are freshly allotted from DVR," it stated.
"As a result, the number of shares granted to shareholders other than mutual funds, AIFs, and insurance companies will be decreased by the amount of TDS. Such TDS might be claimed on their income tax return. "The trust will issue a certificate to that effect," it stated.
On the other hand, capital gains tax will be levied on the conversion of DVR shares; the cost price of such shares is considered to equal the closure price of ordinary shares on August 30.
"In our opinion, even if TML Securities is obliged to sell 0.6 to 0.88 crore of ordinary shares (received on DVR conversion as stated above), it will have little influence on Tata Motors' stock price. We anticipate that TML securities trust will complete this transaction within T+15 days, as stated in the company's schedule," according to the research.
