I had 200 Tata Motors DVR shares. Based on the 7:10 ratio announced by Tata Motors, I expected to receive 140 shares, but the actual number is less. I read somewhere that taxes are being withheld, which caused me to receive fewer shares. Can someone clarify this?
Hey @Yash_Chaudhari ,
Tata Motors Ltd. (TML) had announced the cancellation of its DVR shares (‘A’ ORD) and issue ordinary (ORD) equity shares in exchange. The conversion or swap ratio is 10:7, meaning you will receive 7 ordinary shares of Tata Motors for every 10 DVR shares.
So, if you own 200 DVR shares, you should ideally receive 140 ordinary shares.
Assuming the price of each ordinary share (as on effective date) to be ₹1000, you are entitled to receive ordinary shares worth ₹1.4L (140* ₹1,000). This is the total consideration.
Now the total consideration will include two components: deemed dividend and capital consideration. Both these components will be subject to taxation and the company will deduct applicable TDS on them by selling some of your shares.
What is deemed dividend?
The process of converting DVR shares to ordinary shares involves distributing some of the company’s accumulated profits to shareholders. Since this profit is settled in the form of new shares (instead of cash), it is referred to as deemed dividend.
The deemed dividend per DVR share is determined by the company considering the accumulated profits as of the record date.
Let’s assume this to be ₹200 per share.
*These figures are based on assumption
Now let’s understand how the total consideration of ₹1.4L will be divided into deemed dividend and capital consideration.
Total consideration = ₹1,40,000
Deemed dividend = 200 * ₹200 = ₹40,000
Capital consideration = ₹1,40,000 - ₹40,000 = ₹1,00,000
A 10% TDS will be levied on the dividend amount, which will be deducted from your total consideration. After this deduction, the number of shares you ultimately receive will be based on the net amount.
You can claim this TDS amount against your tax liability while filing your ITR.
It’s important to note that for resident individuals, TDS applies only to dividend income, not to capital gains. However, if you are a Non-Resident Indian (NRI), TDS will also be deducted on capital gains, and the number of shares will be calculated accordingly.
TML Security Trust is managing the conversion process. They sold a portion of the allocated shares to generate cash for fractional shares and cover the TDS liability. This explains why the number of shares received is less than expected.
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Hey @Sakshi_Jain I read in an article that there can be 3 tax implications in the hands of DVR shareholders, can u explain how?
Hi @Siddharth_Jogi ,
As mentioned earlier, the ordinary shares you receive in exchange for the DVR shares will include two components: deemed dividend and capital consideration.
This results in two types of income:
- Dividend, which will be taxed as income from other sources.
- Capital gains, which will be classified as either long-term or short-term.
Tax on dividend income
The deemed dividend will be added to your total income and taxed according to your applicable slab rate. If the dividend amount exceeds ₹5,000, TDS will be deducted from your total consideration amount, which means you’ll be receiving lesser number of shares. However, you’ll be able to claim this TDS as a tax credit when you file the ITR.
Tax on capital gains
The tax rate on capital gains will depend on whether the gains are short-term or long-term. The holding period in this case will be calculated from the time when you had originally purchased the DVR shares.
- If holding period > 12 months, gains will be long-term and taxed at 12.5%.
- If holding period < 12 months, gains will be short-term and taxed at 20%.
Moreover, TDS will be deducted on the capital gains if you’re an NRI.
Now, if we consider the same case that has been explained above, let’s assume that the DVR shares were purchased in June 2022 at a cost of 300 per share. Then, the capital gains will be calculated as follows:
Keep in mind that these taxes will apply when your DVR shares are converted to ordinary shares, i.e. in FY 2024-25, as this transaction will be considered a ‘transfer of asset’ which results in capital gains.
At this point, you haven’t sold the ordinary shares you received. If you decide to sell them later, capital gains tax will apply again. However, since you already paid taxes at the time of the transfer, the cost of acquisition for these ordinary shares will be considered the closing price as of 30 August 2024.
If you have received a lower number of shares for Tata Motors DVR, it may be attributed to various factors. Share distribution could be affected by market conditions, investor sentiment, or changes in the company’s performance. Moreover, DVR shares often attract specific investors who prioritize dividends over voting rights, which could impact demand. Keep abreast of market trends and company updates to comprehend the underlying dynamics, and consider consulting your broker for clarification regarding your holdings!