Reliance rejigs holding pattern to save on tax

Reliance Industries Ltd has undertaken a significant restructuring of promoter holdings, under which a significant chunk of shares have been transferred to a limited liability partnership.

Experts said the move would reduce the dividend distribution tax before the Direct Taxes Code kicks in. In the financial year ended March 31, the company paid dividend distribution tax of Rs 346 crore (Rs 3.46 billion). For FY09, the outgo was Rs 322 crore (Rs 3.22 billion).

According to a stock exchange announcement, the promoter group, which held shares through 32 entities, would now transfer their shares, representing 34.17 per cent of voting rights, to a total of 61 entities, including 27 LLPs. The transaction was completed on August 11.

"The transfer and acquisition is part of the inter-se transfer without consideration amongst the group," the announcement stated.

LLPs are an alternative corporate business vehicle that offers the benefits of not only limited liability, but also allows its members the flexibility to organise their internal structure as a partnership based on an agreement.

According to tax experts, the restructuring would lead to a much lower tax outgo on dividend distribution.

"A holding under the LLP structure will help them avoid the dividend distribution tax, which is applicable at 16.61 per cent in the case of companies," said Sunil Jain, partner-taxation at J Sagar Associates.

"As the Direct Taxes Code comes into effect from April 1, 2011, RIL could be restructuring before that to gain tax advantages. The company has treasury stock of Rs 13,000 crore (Rs 130 billion) on its balance sheet," explained Jagannadham Thunuguntla, equity head at SMC Capitals.

Analysts believe that shifting treasury stock to LLPs might help the company save tax, even after Direct Taxes Code is introduced. It will make long-term capital gains taxable.

Market experts, meanwhile, say the restructuring has been done at an appropriate time. "It could not have been done post the new code as the changes proposed may result into higher tax outgo for the group," said Deven Choksey, managing director, KR Choksey Shares and Securities.

"The new structure will be more revealing in terms of ultimate beneficiaries of stakes. Earlier, some trading and investment companies were among the promoters of RIL and it was not clear who the beneficiaries were," said S P Tulsian, independent equity advisor.

The promoter group entities that transferred their holdings into the LLPs and other private firms included Kankhal Investments and Trading Company, Kardam Commercials Private Ltd, Kshitij Commercials Private Ltd, Nityapriya Commercials Private, Amur Trading Private Ltd and Eklavya Enterprises Private Ltd, among others.

These are the entities through which the promoters of RIL, including the Ambani family members, held their stake in the group companies.