Piramal Health & Piramal Lifesciences-Special Situation-Tax Angle

Query from Kiran on Twitter set me thinking that tax aspect of this transaction is something that I did not analyze originally. I kind of assumed that the gain that I make in the transaction ( hopefully) will be short term capital gain in nature and I will be able to adjust these with short term capital losses during the year.

So about 15 minutes of diving through the Taxmann’s Direct Taxes Primer yielded the following:

Assumption: buying 4 shares of PLSL and getting 1 shares of PHC besides the 4 shares in PLSL after the demerger excercise is over ( we are fairly close to the event in my recokning ).

As per section 49(2)C of I.T. Act cost of acquisition of shares in the resulting compay ( PHC) which bears to the cost of acquistion of shares held by assessee ( you) in the dmerged company ( PLSL) the same proportion as the net book value of the assets trasferred in a demerger bears to the networth of the demerged compay immediately before such demerger.

This in our case means pretty much 100% since I do not see any other business being carried on by PLSL ( there may some marginal other business like herbal business but I think that is pretty much immaterial).

If we take the accumuated losses in the books of PLSL as assets of the company then the ratio of assets transferred and networth is 100%. This means that your cost of acquisiton of PLSL will be treated as zero post the event and all the value will then reside in PHC shares ( of course I am hoping that market does assign some value to PLSL-may be few rupees which should act as the icing on the cake ). However the picture gets complicated if we do not take the accumulated losses into calculation. the percentage then turns negative. This is where I need help of an experienced Tax CA or advocate to clarify. Of course PHC will send out a letter alongwith the letter of allottment that should clarify this position.

Following points are to be noted:
1. For the purpose of determing whether the asset is long term or not the relevant date would be the date of acquisiton of PLSL. Hence if you hold the resultant shares of PHC for one year from the date that you bought PLSL shares, you will be entitled to benefit of long term capital gain tax rate ( zero ).

2. Indexation will start from the date of allottment of PHC shares ( not relevant for our purposes since PHC is a listed company and most likely when you sell, you will sell in the market and pay STT. However if you transfer PHC shares outside the market, this date of start of indexation will be relevant.

There is whole lot of other related stuff like depreciation, transfer definitions etc but not material for the limited purpose of this post.

Piramal Healthcare-Piramal Lifesciences

Piramal Healthcare ( PHC ) is folding in the New Entity Research Business of Piramal Lifesciences ( PLS ) into itself and is issuing 1 shares of itself for every 4 shares of PLS. No shares will be issued for its own stake in PLS. Once this takes effect there will be a dilution of approximately 4% in the earnings for PHC.

Towards the fag-end of today’s trade ( Oct 11,2011), PHC fell off to 348 from 352 while there was strong buying interest in PLS at 88 and above and it closed at 89.

The process of hiving off of the business from PLS has been on since May and the final clearance from Bomaby High is expected any day.

At the current prices, if the residual business of PLS is valued at even Rs 5 per share then the equivalent price for PHC works out to 336 ( 89-5)*4. At zero residual value ( an unlikely event ) the e.v is 356.

If one gets an opportunity to short PHC at a price above 356, I would think that trader is likely to make money.  If the residual value is assessed by the market at more Rs 3 then even after transaction charges there is profit to be made.

I think the whole process should be over within the FNO expiry of November month.

Disclosure: I am long PLS and short PHC for now more than a month.

Pl. take whatever I say with a pinch of salt and do your own research before taking any action. It is your money and that should be very dear to you.