Tata Chemicals has found a convenient way to prop up its bottom line and reduce tax liability in a difficult year by merging its wholly-owned subsidiary, Sabras Investment, with itself.
The company’s shareholders had approved the merger at an extraordinary meeting on Wednesday. With the merger, profits on sale of investments held by Sabras will directly accrue to Tata Chemicals.
Sabras held 65.65 lakh ACC shares at the end of March 2000. This block of ACC shares is to be sold to Gujarat Ambuja group at Rs 370 a share during the current year, in line with the plans of the Tata Group to completely divest its stake in ACC.
The sale of the block of ACC shares will lead to a capital gain of Rs 207.75 crore. After paying capital gains tax, the net profit on sale of ACC shares would have gone to Tata Chemicals by way of dividend.
Sabras would have paid dividend tax of 22 per cent on the amount paid to Tata Chemicals as dividend.
In the hands of Tata Chemicals, the dividend from Sabras would have been tax free. But, if Tata Chemicals distributed the dividend it received from Sabras as dividend to its shareholders, it would again be required to pay a dividend tax of 22 per cent. This can be construed as some form of double taxation.
With the merger, double payment of dividend tax on profit on sale of investments, including that on ACC shares, is avoided. The merger is effective from April 1, 2000.
When contacted by the Economic Times, top Tata Chemicals officials said: "The merger will help the company save on its tax liability, as otherwise there would be an incidence of double taxation on dividend payout."
The official also confirmed that the decision to merge the investment company was taken as "it was a cost-effective way to bolster the bottom line of Tata Chemicals."
Sabras earned pre-tax profit of Rs 160 crore for 1999-2000. Of this, Rs 153.41 crore was on account of sale of investments. Sabras paid a dividend of Rs 200 per share (Rs 100 paid-up) and distributed Rs 17.60 crore for 1999-00.
Tata Chemicals earned dividend income of Rs 37.07 crore, including Rs 17.60 crore from Sabras.
Sabras has already sold nearly 42 lakh ACC shares to Gujarat Ambuja during the current year, since March 31. It currently holds 23,68,587 equity shares in ACC, which constitutes a 1.39 per cent equity capital of ACC.
Sabras Investments’ average cost of the ACC holding is around Rs 53.58 per share, which will translate into a profit of Rs 316.42 per share in the cement company.
Also, Tata Chemicals holds 5.65 lakh ACC shares (0.33 per cent), which will generate another profit of Rs 20.85 crore. Out of the Tata Group’s current stake of 3 per cent plus in ACC, Sabras Investments has the largest share at 1.39 per cent.
The remaining stake is shared by Tata Sons (0.71 per cent), Tata Chemicals (0.33 per cent), Tata Tea (0.12 per cent) and Bambino Investments (0.48 per cent).
The Tata Group, it may be recalled, has already divested around 10.3 per cent stake that it held in ACC to Gujarat Ambuja at Rs 370 per share.
Apart from its holdings in ACC, Sabras Investments holds large equity investments in some other Tata Group companies, including Tata Tea, Rallis India, Tata Telecom and Tata Finance.
Tata Chemicals is in the process of finalising a major restructuring programme after its profitability took a severe hit during the last fiscal.
For the financial year ended March 31, 2000, Tata Chemicals has reported a lower profit of Rs 117.29 crore against Rs 181.67 crore in the previous year.
Heavy dumping from China and reduction in retention prices of urea have negatively impacted its core soda ash and fertiliser businesses. With global soda ash capacities lying unutilised, the pressure on prices will continue in the current year.
The bleak outlook has forced the management to refocus the operations of the company.
The company is also planning to strike marketing alliances with established domestic players, since its non-core businesses like cement and detergents do not have critical mass.
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