Foreign Portfolio Investors (FPIs) who have held Bajaj Finance shares since before 2018 may soon be facing a significant tax burden, all due to the company’s recent stock split and bonus share announcement.
What’s the Issue?
Last week, Bajaj Finance declared a 1:2 stock split along with a 4:1 bonus share issuance—its first in nine years. While the announcement was celebrated by many shareholders, legacy FPIs could be in for an unpleasant surprise.
The bonus shares, though free, could end up costing FPIs heavily in taxes.
Understanding the Tax Impact
The root of the issue lies in the capital gains tax rules and the grandfathering provision introduced in 2018. Under these rules, investors who bought shares before January 31, 2018, were allowed to use the fair market value (FMV) of the shares on that date as their cost of acquisition. This helped reduce the capital gains tax burden when shares were eventually sold.
However, bonus shares are treated differently under tax laws.
Bonus shares do not qualify for the FMV benefit under the grandfathering clause.
This means they are treated as new allotments with zero acquisition cost.
In the case of Bajaj Finance, FPIs will receive four bonus shares for every one share held, and the entire sale value of these bonus shares becomes taxable when sold, as there is no cost base to offset.
What Experts Are Saying
According to tax professionals, this technical difference between stock splits and bonus shares could lead to a sharp increase in the tax payable by foreign investors. While a stock split merely divides the existing cost base among more shares, bonus shares create a new cost base of zero.
“This puts legacy FPIs in a tricky position, as any gains from selling these bonus shares will be taxed in full,” a tax expert commented.
Broader Implications
While domestic investors may also feel the pinch, the impact is especially sharp for long-term FPIs who relied on the grandfathering relief to plan their tax liabilities. This could potentially affect how FPIs approach bonus issuances in Indian equities in the future.
For legacy FPIs, the bonus issue may not feel like a bonus after all.
