Small investors face double whammy as companies get delisted

The story was first published on August 6, 2021When elephants fight, it is the grass that suffers. Nowhere is this African proverb more apt than in the stock market today. Thanks to a host of factors, companies are unable to fulfil their listing obligations and are being delisted from the exchanges. When this happens, large investors and institutions manage to avoid huge losses by taking recourse to tax write-offs. But the small investors – those who hold shares aggregating up to Rs 2 lakh of share capital of a company –are left high and dry.Take a look at what happened recently. On June 11 this year, shares of Dewan Housing Finance (DHFL) were traded on the BSE and NSE for the last time. On BSE, it closed the session at Rs 16.70, down 10% on the day, the maximum permissible daily slide that was allowed by the bourses.The two bourses had suspended trading in DHFL as per a National Company Law Tribunal (NCLT) order of June 8 which attributed no value to the shares of the company when it was transferred to Piramal Capital & Housing Finance under the Corporate Insolvency Resolution Process (CIRP) within the Insolvency & Bankruptcy Code (IBC). There were nearly 3.8 lakh small shareholders in DHFL the day its stock was suspended on the bourses, BSE data showed.On June 12, those DHFL shares held by those 3.8 lakh shareholders turned worthless. The remaining shareholders (those with shares of more than Rs 2 lakh) had it far better. That’s because institutional and corporate shareholders had the option to adjust the losses incurred from these shares against profits from stocks of any other company. Small shareholders don’t have that option.Small investors in DHFL are not alone to be hit by such losses. There were nearly 3.3 lakh such shareholders in Videocon Industries in exactly the same situation. According to debt resolution professionals working under the IBC, there are shareholders in 100s of such companies facing similar losses. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r BSE alone lists 227 companies which are currently going through the CIRP process under IBC. Several of these companies have over one lakh small investors as shareholders. If these companies are delisted under NCLT orders and these small investors do not exit at whatever price they can get now by selling their shares, they are sure to face a similar double whammy once those stocks are delisted. NSE also lists 145 companies which are under various stages of resolution under the same code. Most companies are common between BSE and NSE.A double whammySmall shareholders in compulsorily delisted companies make an obvious loss because the shares they own are worthless post delisting. But these shareholders are also hit by an unfair tax loop that is available only to institutional and corporate shareholders. The Income Tax Act allows only institutional and corporate shareholders to record their shareholdings as “inventory”. Saurabh Agarwal, director, Kennis, a corporate advisory firm, explains. “If investors have recorded these shares as ‘Inventory’ rather than ‘Capital Asset’, they can claim business loss on such extinguishment under the head ‘Income from Business’, revaluing such shares at ‘zero’ value under the concept of ‘Cost or Market Value’, whichever is lower.” This is not an option for small shareholders; only shareholders who hold shares under a corporate or limited liability partnership structure can mark their holdings as inventory and claim business loss.There’s another strike against small shareholders. If the shares were traded, and if they sold at a loss, the concept of capital loss can kick in. However, when there is no transfer of assets through the stock exchanges or otherwise, “one can’t book capital loss”, says Agarwal. Market players and tax experts agree that this is an anomaly in the Income Tax Act. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r Scrambling for succourWith no legal way to cut their losses, some small investors are taking a convoluted, and potentially problematic, route. In off-market deals, that is, deals made outside the stock exchange set-up, these shareholders transfer shares to family and friends for some nominal amount. This transfer is then shown as a capital loss, and set off against gains made in other shares they hold.“When stocks (like DHFL and Videocon Industries) get extinguished, they also lose ISIN and cannot be traded on the exchanges,” said Vijai Mantri, chief investment strategist & mentor, JRL Money, an investment advisor firm. ISIN stands for International Securities Identification Number, a unique 12-digit alpha-numeric code given to every security including stocks, bonds, derivatives, commodities etc.“Not only do these stocks [in delisted companies] not generate returns but also the losses in these stocks cannot be booked. In such situations, the only option left with investors is to book losses off-line and that can always be questioned by the Income Tax department,” Mantri said.To insulate such losses incurred by small investors, the IT department could allow small investors to book capital loss for that particular ISIN that is suspended under NCLT order, for a limited number of years, industry players said. “With the number of companies being taken to NCLT under IBC increasing, the number of small investors suffering such losses is sure to increase. A minor tweak in IT rules could bring in a much needed respite to these investors,” said an official with a register & transfer agent. What’s Sebi doing?As more and more companies face compulsory delisting under IBC, retail investors’ plight is getting worse. If not addressed soon, this could turn out to be a big issue with a significant proportion of small investors hit badly.Realising the gravity of the situation, Sebi has stepped in to warn retail investors about the losses they can face. It has also ordered companies under CIRP to make proper and regular disclosure to the exchanges.On July 9, BSE and NSE jointly said that in recent times there were instances where NCLT has pronounced an oral order under CIRP about delisting of a company without any payout to its shareholders. Such information was not disclosed to the bourses, as companies claim they were waiting for a written order, which usually takes a few days. “By this time, the information may be available to a select group of people and may create information asymmetry and confusion in the market,” the statement said.To correct such anomalies and information asymmetry, BSE and NSE said that the resolution professional (RP) should disclose such information, even if it’s an oral order, to the bourses within 30 minutes of the pronouncement. The RP should also disclose the impact of the NCLT order on shareholders, including any write-off, extinguishment or delisting of stocks. The exchanges are also working on tagging companies referred to NCLT and the stocks on their platform.These are small steps that may not really help small shareholders. If shares are not compulsorily delisted, there’s some hope that they can recoup at least a portion of their loss. As in the case of Jet Airways, the company can go through a resolution process and be run by new owners, without its stock being delisted.In the case of compulsory delisting, meanwhile, if shareholders are not to be hit multiple times, the Income Tax rules need to be changed to allow delisted shares to be shown as capital loss. Till that happens, small shareholders will face the double whammy of losing money on the shares, and not be able to set off that loss.Untitled Carousel 83801334