HDFC merger: tax implications for shareholders
The record date for the merger of HDFC Ltd with HDFC Bank was 13 July. The record date is the cut-off date set by a company to determine the eligibility of shareholders to receive dividends and distributions. As per the share exchange ratio of the merger, for every 25 shares of HDFC, 42 shares of HDFC Bank were issued to the former’s shareholders. If we break this down to per share level, one can say that the ratio is 1.68 shares of HDFC Bank for every 1 share of HDFC.
Shares are considered capital assets under income tax (IT) law, and any gain on their sale is treated as capital gains. However, in the case of a merger, the IT law does not consider the swap of shares as a transfer, ensuring that it is tax-neutral for shareholders. To qualify for this tax-neutral benefit, the merger must meet certain criteria. First, all assets and liabilities of the amalgamating company must be transferred to the amalgamated company. Second, a minimum of 75% of shareholders (in value) of the amalgamating company must become shareholders of the amalgamated company. The case of HDFC Bank qualifies for both of these conditions.
Capital gains on sale of shares is calculated on the basis of the holding period and the date of acquisition of shares. If someone receives shares as part of a merger, the holding period is counted from the date of purchase of the amalgamating company’s shares (HDFC Ltd in this case).
Let’s understand this with an example. Suppose you bought 30 shares of HDFC Ltd on 1 April 2019 at ₹2,000 per share, thus spending ₹60,000. As per the share exchange ratio upon merger, you are entitled to receive 50.4 (42/25*30) shares of HDFC Bank. But since there is no concept of fractional shares in India, you will be issued 50
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