The Hindu Business Line : IOC, ONGC block deal plan to help save on capital gains tax

THE block-deal route proposed by by Indian Oil Corporation (IOC) and Oil and Natural Gas Corporation (ONGC) for offloading their cross-holdings will help them save on capital gains tax and other costs. More importantly, the deals are likely to be struck so that there will not be any immediate increase in liquidity in the market, which could have had a telling effect on the prices of the respective stocks.

While IOC has already proposed offloading (at current market price) part of its cross-holding worth around Rs 15,000 crore in ONGC, the latter is now actively considering diluting part of its investments worth close to Rs 6,000 crore in IOC. IOC has 9.61 per cent stake in ONGC. ONGC holds 10 per cent in IOC.

Together, IOC and ONGC are expected to offload cross holdings worth Rs 4,000-5,000 crore in this fiscal. Of the two, IOC's proposal to offload 2-2.5 per cent holding in ONGC worth between Rs 3,000 crore and Rs 3,700 crore, in the first instalment, is at an advanced stage of finalisation.

An IOC official said that as per the current tax norms on long-term capital gains, block deals struck through the stock exchange with a minimum of one year holding, that is, with a lock-in on further transaction for a period of one year after the deal, are exempt from the tax (11.2 per cent with surcharge).

Also, the company would save six to seven per cent discount normally offered in the case of public offer coupled with two to three per cent issue expenses. "Comparatively, the total cost involvement in block deal is roughly two per cent," according to sources.

According to market sources, on capital gains alone IOC is likely to save tax incidence of anything between Rs 300 crore and Rs 400 crore on the proposed first instalment off-loading expected to take place in 2005-06. Similarly, if ONGC offloads 2.5 per cent holding in IOC through the block-deal route, it will save tax worth close to Rs 150 crore.

ONGC closed at Rs 1,152 on Wednesday, while IOC closed at Rs 522.