For many long-term investors who own stocks of blue-chip companies, shares are a matter of legacy to be passed on from one generation to another.
Just like Anandakumar and his wife Srilekha. They have been accumulating blue-chips over the last 35 years. And Anandakumar feels it is time now to distribute these accumulated assets among his two sons, Ravi and Ram, and reorganise their holdings. Each has a demat account with Integrated Enterprises.
As this is a transaction without any consideration - a gift - Anandakumar wants to transfer the shares through off-market trades. The procedure and financial implications of off-market transfer of shares are outlined here.
Off-market trade procedure
Listed securities. In this case, both the transferor and receiver are likely to have a demat account which can be with any of the two depositories - National Securities Depository or Central Depository Services (India). Off-market trades can take place between two individuals who have the same depository participant, or different DPs. It can also take place between individuals having accounts with two depositories.
The same delivery instruction slip can be used for market and off-market trades by choosing one of the two options given in it. In the off-market trade option, the transferor has to give details of the receiver, including the name of his DP, his DP identity number, the name of the security being traded, the ISIN number (a code unique to the shares of a company) and quantity of shares transferred.
If Anandakumar transfers 1,000 shares of Reliance Industries to Ravi, he will have to submit the DIS to IEL along with additional details like the purpose of transfer. IEL will load this into the NSDL database following which the credit will take place in Ravi's account.
Ravi should have a standing receipt instruction (an instruction given by the client to receive any shares in his account) else he will have to fill up the receipt instruction with details of the transferor. The standing instruction is normally the default option.
The procedure does not change for a share transfer from a CDSL demat account to an NSDL demat account as the requisition form is the same.
According to Bhavesh Shah, vice-president (research), Asit C Mehta Investment Intermediates, a brokerage services firm, "NSDL uses a different form called inter-depository transfer form. For transferring shares from an NSDL account to a CDSL one in an off-market trade, the transferor will have to use the IDT form."
The transferor should fill out the correct details in the DIS and avoid overwriting. In case a receipt instruction is also required, the details in the delivery and receipt instruction must match.
Investors need to be very careful with the execution date mentioned in the two forms. The transfer would be rejected if there is a mismatch in this regard even if all other details in the two forms match.
Unlisted securities. The transferor can transfer unlisted shares only through off-market transactions. And as many of these securities may still be in physical form, the transferor has to give the signed transfer form to the receiver.
The receiver has to approach the company to get the transfer procedure completed. This will be the procedure for those who continue to hold listed securities in physical form.
Tax treatment for off-market trade. Just like any other transaction, the tax implication of trades done via the off-market route also depends on the period of holding of the securities and the consideration received. "Off-market transactions are not always treated as short-term transactions," says Uday Dhoot, chief operating officer, International Money Matters, a financial advisory firm.
As Anandakumar's will be a transaction without consideration (a gift), he will not have any tax obligation upon transfer of shares to his sons. Dhoot feels it would be an advantage if there is a gift deed. And if Ram or Ravi sell the shares (after any period of holding) that they receive from Anandakumar through normal market trades, they will not have to pay tax as they will be eligible for long-term capital gains.
Share-holding periods of more than 12 months are considered as long-term. The shares that will be transferred to them have been accumulated by their parents over the last 35 years and, hence, are long-term holdings. They will have to pay the securities transaction tax on sale of their shares.
But if Ram or Ravi sell the shares through an off-market transaction, they will have to pay LTCG tax. Here, the cost of acquisition will be the rate at which the parent had acquired the stock. If Anandakumar had bought Reliance shares at Rs 200 and Ravi sells them at Rs 2,100, then Ravi will have to pay LTCG tax. Ravi will have two options.
One will be to pay 10 per cent tax on the difference of the sale and purchase consideration, that is, Rs 1,900. The second option will be to claim the benefit of indexation on the cost of acquisition (this will discount the effect of inflation on price) and pay 20 per cent tax on the difference between the sale price and the adjusted cost of acquisition.
And to decide which option is suitable, it will be best to take the advice of a tax consultant. In case the off-market transaction takes place for a consideration within 12 months of acquiring the shares, the seller has to pay short-term capital gains tax depending upon his income bracket. If his income is above Rs 10 lakh (Rs 1 million), for instance, he will have to pay a tax of 33.99 per cent.
As the case of Anandakumar illustrates, the off-market route suits instances when consideration is not involved in the share transaction. If you, too, want to gift shares, you can bypass the market after taking into account the relevant factors.
Off-market vs market trades
Market trades go through stock exchanges and the clearing house. Details like the quantity, price and time of the transaction are recorded. Off-market transactions take place without the involvement of the clearing corporation or stock exchanges and may not involve any payment (a gift, for example).
Bhavesh Shah, vice-president (research), Asit C. Mehta Investment Intermediates, a brokerage services firm, feels that as off-market trades are not executed on the exchange, the price discovery mechanism may not be as efficient as it can be.
Market trade has a cut-off time within which the delivery instruction slip (DIS) has to be given to the depository participant (DP). Off-market trade is between two parties and, therefore, not bound by any market schedules.
Market trades attract brokerage, securities transaction tax and service tax. Off-market trades attract only transfer charges: depository charges of Rs 5 and DP charges in the range of Rs 10 to 0.05 per cent of transfer value. This amount is debited from the client's account.
Market trades are transfers made to brokers with a specific settlement number, whereas off-market trades happen to an individual's account without the settlement number.
What is an off-market trade?
A trade settled directly between two parties without the involvement of a clearing corporation or a stock exchange.
The transaction payment, if any, takes place outside the environment of the depository, National Securities Depository or Central Depository Services.
This is an option for bulk deals between institutions, trades between private parties, transfer of securities between a client and a sub-broker and transactions for unlisted securities.
Until recently, people transferring shares through the off-market route did not have to offer any reason for the transfer. But efforts to prevent money laundering have gained a lot of significance globally of late. So, both the depositories have been advised to enhance the scope and quality of alerts sent to their DPs to identify suspicious transactions as a part of submission of information to the Financial Intelligence Unit-India (FIU-IND). NSDL and CDSL have instructed their DPs to capture additional information on off-market trades like the consideration and reason for transfer.
FIU-IND was set up by the Government of India as the central agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.
