Dealers active in the unlisted market have welcomed the move, and said it would bring a positive change in the industry.
The Securities and Exchange Board of India (Sebi) has approved a proposal to cut by half the lock-in period for the existing shareholders of the company in initial public offerings (IPO).
The markets regulator has reduced the lock-in period for minimum promoter contribution of 20 per cent in the IPO to 18 months from the current three years. For pre-issue capital held by non-promoters, the lock-in period has been halved to six months from the existing one year.
Umesh Paliwal, Co-founder, UnlistedZone, said many investors used to see the one-year lock-in after IPO as a key risk to their investment. “The move is likely to increase the volume and number of participants in the market in coming days,” he said.
“This is an excellent move by regulators in the interest of Investors. This move will ensure true price discovery of stock prices with more liquidity and transparency,” said Amit Jain, chief Strategist, Ashika Group.
However, investors should not miscalculate the tax implication of the pre-IPO equity after the update, as only the lock-in period has changed and the tax implication remains the same as earlier.
Navneet Dugar, Principal Advisor of Zemis Advisors, said it would give investors the option for early exit, but they will have to pay short-term capital gain tax in such cases.
“Investors will have to calculate their tax liability, once they decide to sell their stake in the company,” he said.
If one sells a stake after the completion of six months of the mandatory lock-in period from the date of share allotment, s/he will be charged with short-term capital gain tax. The gains (profit) will be added to the income of the holder and charged accordingly on the basis total income.
However, if the equity shares are held for more than a year after listing, the gains would be subject to long-term capital gain tax, as per existing rules. The holding period will be calculated from the day of listing of the stock.
The pre-IPO shares will be taxed either as short-term capital gains (if held for less than 24 months) at the rate of 30% (excluding surcharge and education cess) or long-term capital gains at the rate of 10% or 20% if held for more than two years (excluding surcharge and cess, but with indexation benefits),” said Ravi S Raghavan, Partner, Tax and Private Client Group.
“You don’t have to pay GST or securities transactions tax on pre-IPO shares,” he said.
