Gray market excited after blocking period for unlisted shares halved
Dealers active in the unlisted market welcomed the move and said it would bring positive change in the industry.
The Securities and Exchange Board of India (Sebi) has approved a proposal to halve the lock-up period for existing shareholders of the company in initial public offerings (IPOs).
The market regulator has reduced the lock-in period for the promoter’s minimum 20 percent contribution in the IPO to 18 months from the current three years. For pre-issue capital held by non-promoters, the blocking period has been reduced from half to six months compared to the current year.
Umesh Paliwal, co-founder of UnlistedZone, said many investors view the one-year lock-in after the IPO as a major risk to their investment. “This decision is likely to increase the volume and number of participants in the market in the coming days,” he said.
“This is an excellent decision by regulators in the interests of investors. This move will ensure true share price discovery with greater liquidity and transparency, ”said Amit Jain, Chief Strategist, Ashika Group.
However, investors should not miscalculate the tax implication of equity before the IPO after the update, as only the lock-in period has changed and the tax implication remains the same as before.
Navneet Dugar, senior advisor to Zemis Advisors, said it would give investors the option of an early exit, but they will have to pay short-term capital gains 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 a person sells a participation after the expiration of six months of the mandatory lock-up period from the date of allocation of the shares, he will be subject to short-term capital gains tax. The earnings (profits) will be added to the owner’s income and billed accordingly on the total base income.
However, if the Equity Shares are held for more than one year after listing, the gains would be subject to long-term capital gains tax, in accordance with the applicable rules. The holding period will be calculated from the day the share is listed.
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 surtax and education cess) or as long-term capital gains at the rate 10% or 20% if held for more than two years (excluding surtax and cess, but with indexation benefits), ”said Ravi S Raghavan, partner, tax and private clients group, Majmudar & Partners.
“You don’t have to pay GST or pre-IPO stock trading tax,” he said.