"BLOCK DEAL NOT POSSIBLE DUE TO PRICE BAND"

Bulk deal in Ranbaxy likely
Move To Help Promoters Save On Rs 1,000-Cr Capital Gains Tax

RANBAXY promoters are likely to use the ‘bulk deal’ route to sell their shares to Daiichi Sankyo. Through this window, they can sell their shares through the stock exchange without being bound by the price restriction of a ‘block deal’ and without having to pay long-term capital gains tax of around Rs 1,000 crore. The Ranbaxy promoters will gross Rs 9,576.3 crore by selling their 34.82% stake in the country’s biggest drug maker.

As reported first by ET in its edition dated June 14, there is a clause in the deal agreement between Ranbaxy promoters and Daiichi Sankyo, which says that the promoters holding will be sold through a stock exchange transaction. A stock exchange transaction of this kind, can be done either through a ‘block’ deal or a ‘bulk’ deal.

As per the norms, a block deal transaction has to be done at a price which is close to the existing market price.

The Sebi circular dated September 2005, said that a trade with a minimum quantity of 5 lakh shares or having a minimum value of Rs 5 crore executed through a single transaction on the stock exchange will constitute a ‘block deal’. This block deal is subject to conditions like time period of trade, delivery-based trading and more significantly a price range, which is not to exceed more than 1% from the existing market price or the closing price of the stock on the previous day.

However, in the case of Ranbaxy, the scrip is trading at a sharp discount to the negotiated price of Rs 737 per share. Therefore, Ranbaxy promoters can sell their shares to Daiichi Sankyo through a block deal, only if the share price shoots up by 26.7% against the closing price of Rs 581.45 at BSE on Tuesday. Bulk deals a way out
THE bulk deal route offers a way out. As per a circular dated January 2004, which brought disclosure norms for large stock deals, all transactions in a scrip, where the total quantity of shares bought or sold is more than 0.5% of the number of equity shares of the company listed on the exchange, are bulk deals.

This is applicable even when the deal is struck through multiple transactions as long as the cumulative shares under consideration exceeds the 0.5% threshold. Incase of Ranbaxy, the transaction would necessarily come under the scope of bulk deal as the total stake being sold is more than 34%. The bulk deal circular of 2004 does not impose any price range condition.

A stock exchange transaction will save the promoters capital gains tax of around Rs 1,000 crore, which they would have to pay if this was an offmarket transaction. Unlike an off-market transaction which attracts a 10% long-term capital gains tax in addition to 1% surcharge and an additional 3% tax on the surcharge, stock exchange transactions do not attract capital gains tax. A bulk deal through the stock market will mean that Ranbaxy promoters will have to pay a nominal securities transactions tax of 0.125% in addition to broker’ fee and 12.5% service tax (on the broker’s fee), which could run into few crore.