Of Share Warrants, Share Certificates and Capital gains

Hi MKK,

Since a Share Warrant is a creature of the Company law, I think weneed to examine the meaning of a Share Warrant in the context of theCompanies Act to better understand what it really is. Here's whatSection 114 of the Cos Act states:[114. (1) A public company limited by shares, if so authorised byits articles, may, with the previous approval of the CentralGovernment, with respect to any fully paid-up shares, issue underits common seal a warrant stating that the bearer of the warrant isentitled to the shares therein specified, and may provide, bycoupons or otherwise, for the payment of the future dividends on theshares specified in the warrant.(2) The warrant aforesaid is in this Act referred to as a "sharewarrant".(3) A share warrant shall entitle the bearer thereof to the sharestherein specified, and the shares may be transferred by delivery ofthe warrant.]So a share warrant ISN'T in my opinion a Rights Entitlement. It is aRight in itself. The share warrant is a kind of a bearer cheque,whilst a share certificate (demat or physical) is akin to an accountpayee cheque. The holder of a share warrant is an anonymousshareholder. Since the holder of a share warrant is entitled todividend on the shares specified on the warrant, it stands to reasonthat he's the de facto owner of the shares, though he isn't a memberby virtue of Section 2(27). And sub-section 3 above even speaks ofhow the transfer of the shares may be effected by mere delivery ofthe warrant. So clearly a Share warrant constitutes an asset atleast as far as the Companies Act is concerned. A share warrantseems like a surrogate share certificate. It was invented to getaround the cumbersome procedure that involves transferring sharesthrough a share certificate (although in the present-day Dematregime, share warrants seem like things of the past).I don't see any reason why we should interpret things differentlywhen we have to judge the taxability of the gains from the sale ofshare warrants under the Income Tax Act.But even consulting the Income Tax Act seems to lead us to theconclusion that a Share Warrant is a capital asset. The proviso toSection 2(42A) that fixes the age of certain capital assets at 12months after which they turn "long-term", says:[……. in the case of a share held in a company or any other securitylisted in a recognised stock exchange in India…..]A security is defined u/s 2(h) of the Securities Contracts(Regulation) Act 1956 as follows:[(i) shares, scrips, stocks, bonds, debentures, debenture stock orOTHER MARKETABLE SECURITIES OF A LIKE NATURE in or of anyincorporated company or other body corporate;(ii) Government Securities(iia) such other instruments as may be declared by the CentralGovernment to be securities;(iii) rights or interests in securities;]So even if we argue that Share Warrants are Rights, they would stillamount to Securities in the view of the (iii) above.Since share warrants too are securities in terms of the proviso toSection 2(42A), the time-clock for determining whether they're long-or short-term capital asset would start ticking from the date ofallotment of the Share Warrant. So as far as the taxation law isconcerned, it seems share warrants and share certificates are twosides of the same coin. Mr Goenka, I think no CG will arise at thetime of conversion of warrants into shares. The transaction seems amere ceremony—a Kacha shareholder becoming a Pucca, registeredshareholder. I can't smell anything resembling a relinquishment orexchange or extinguishment of rights in a capital asset.In my view, the CG will be LTCG in nature and the cost will beindexed with reference to the year in which incurred.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "M.K.KRISHNAN" wrote:>>>> Dear Mr.Milind Shah,>> Shares are ordinarily acquired on the date of allotment and the> period of holding of such shares begins with the date of their> allotment. This rule equally applies where shares are allotted in> pursuance of the Rights Entitlement. Warrants are in the nature of> Rights Entitlement and the period of holding of the shares issuedin> pursuance of such Rights begin with the date of allotment This is> confirmed by section 2(42A)(d) which lays down the period ofholding for> such assets as follows:>> "in the case of a Capital Asset, being a share or any other> security (hereinafter in this clause referred to as the financialasset)> subscribed to by the assessee on the basis of his Right tosubscribe to> such financial asset or subscribed to by the person in whosefavour the> assessee has renounced his Rights to subscribe to such financialasset,> the period shall be reckoned from the date of allotment of such> financial asset ">> Therefore I am of the view that on the facts explained by youthe> sale of shares will be assessed as Short term Capital Gains only.>> Regards>> CA.M.K.Krishnan>> Vellore>> Tamilnadu>>>>> --- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, Milind Shah > wrote:> >> > Sir,> >> > But the warrants are held since 2006.> >> > What should be the effect of that?> >> > Regards> >> > Milind Shah> >> >> > Since the Gains have arisen from the capital asset being theShares> (which> > is held for less than a year) - it would result in Short TermCapital> Gains.> >> > Regards, unni> >>> >> > Friends> >> > I have come across a very typical problem> >> > X Ltd has purchased Warrants of Y Ltd. on 30.09.2006 for Rs.2.50> >> > Later on 20.04.2008 the warrants get converted into Shares after> paying the> > balance Rs.22.5 (F.V. 10 + Premium 15)> >> > Of the above part shares are sold on 20.10.2008 for Rs.35 offmarket.> >> >> >> > 1. Now will it be Short Term or Long Term Gain?> > 2. This Gain can be setoff against what loss?> >> > Please reply.> >> >> >> > Regards> >> > Milind Shah