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PERSONAL ACCOUNTS The case of Mayur Das, who had Rs 50 crore in his pocket and the tax-man at the door. By Shyam Kumar
THE MAN: Mayur Das HAD been a successful entrepreneur. At the age of 64, he presided over the destiny of a company which, although not huge in size, was impressive in terms of its achievements. Thirty-seven years ago, Das had quit his marketing job with a slow-moving business conglomerate, and set up shop on his own. Choosing a small niche, Das had gone on to carve out a profitable 40 per cent share of that market over the next three decades. However, his family, following the untimely death of his wife in the mid-1980s, was confined to his daughter, who was pursuing her doctorate in sociology at a university in the US. As a result, the manager-turned-entrepreneur faced a situation where his only child showed little interest in his business, let alone an inclination to help him manage it. Post-liberalisation, the company was starting to slow down, and needed a fresh impetus if it was to survive the rising competition. Bereft of a possible inheritor, Das had faced a difficult decision. Should he await his inevitable demise, upon which the company would almost surely go to pieces in the hands of a bunch of efficient, but uncaring, professional managers? Or should he sell out, and put away a nest-egg for his old age, and bequeath his daughter enough wealth to allow her to indulge in her passion for research without having to bother about the money she needed to do so? THE EQUATION: Faced with this problem of plenty, Das had taken the tough, but sensible, decision of selling out immediately. A possible buyer in the form of a transnational rival, which had sparred with Das in the marketplace for years, had been knocking at his door. After protracted negotiations, the buyer and the seller had agreed on a price without too much acrimony. Having hived off his business to his arch-rival, Das was now due to receive an amount of Rs 50 crore the next Monday for his stake in the company. Of this, Rs 30 crore was the long-term capital gains on this transaction. And the tax liability of Rs 6 crore on this sum was worrying him. That's why Das' financial advisors suggested that he needed to identify the investment avenues that would help reduce his tax payments as well as offer him attractive returns. Having set his financial goals, Das had approached a portfolio management firm that had a specialised desk where such matters were discreetly handled. THE GAMEPLAN: First, the firm tried to understand Das' requirements and his compulsions. Having assimilated both, it then decided to draw up a three-tier investment plan for Das. Its recommendations: 50 per cent of the total amount--or Rs 25 crore--should be invested in assets eligible for benefits under Section 54-ea of the Income Tax Act, 1961. This provided for tax-reliefs from long-term capital gains when the whole, or part, of the sale proceeds are invested in specified assets. If only a part of the sales proceeds are invested in specified assets, the capital gains are reduced proportionately, and the remaining capital gains are taxed. While the lock-in for the investment is three years, it needed to be made within six months from the date of the accrual of such long-term capital gains. 20 per cent--or Rs 10 crore--should be set aside for exploiting emerging investment opportunities in the equities and debt markets. The suggested break-up: 25 per cent for equity, and 75 per cent for debt and related instruments. 30 per cent--or Rs 15 crore--should be allotted for acquiring strategic stakes in some ventures in the future. Until then, this sum of money would need to be parked in short-term money market or debt instruments. THE STRATEGY: After consultations with Das, the plan narrowed down to the specific investments that should be made by him. Of the proposed Rs 25-crore investment under Section 54-ea, it was decided that Rs 20 crore should be deployed in some debt-based mutual funds, under the growth option, before the end of 1997-98 to avail of an additional indexation benefit. With the concessional long-term capital gains tax being 20 per cent, the typical returns for Das would be between 11.50 and 12 per cent post-tax. Further, as a hedging mechanism, a sum of Rs 3 crore would be invested in a mix of tax-free and infrastructure bonds, eligible for investment under Section 54-ea, in the next six months as and when opportunities arose. Yields on these instruments would be anywhere between 12 and 13 per cent per annum pre-tax. And the remaining Rs 2 crore would be invested in equity funds that offered Das a better risk-return trade off. While it was hazardous to predict the returns on such investments, they would be in the range of 12.50 to 13 per cent pre-tax. In the interim, these could also be invested in money market funds as well as certificates of deposit. Tier-II was a portfolio structure that would help Das increase his wealth while taking on only moderate risk. While the Rs 25-crore equity portion of the investment would be dispersed among various sectors as well as several stocks within these sectors, the firm's equity research division would provide the necessary inputs for the purpose. And the remaining debt portion would consist of instruments with varying maturities and would, of course, have undergone the firm's scrutiny so as to not expose Das to undue risk. On these, the yields would be, approximately, 15 per cent per annum. Finally, Tier-III was a investment strategy with the potential to provide yields that could match Das' entrepreneurial expectations, and get his adrenalin flowing. A suitable business would be identified, either in the form of a new venture or an existing one. It could, or not, be related to his existing business, but it would necessarily have the potential to expand with the value that Das could add both in terms of money as well as skills. Here, it was suggested that, until such time as the right business had been identified, the money should be parked in liquid, short-term opportunities in debt instruments, or money market instruments, such as Treasury Bills, government securities, short-term bonds of public sector units or financial institutions, short-dated corporate paper et al. Then, Das got down to working out his weighted average yield. He assumed that the equity, and equity-related instruments, would fetch him a yield of between 20 and 22 per cent per annum while he pegged the yield at 30 per cent on the new business ventures. He was euphoric on finding out that, on the whole, the yield from his portfolio would be between 20 and 25 per cent per annum pre-tax. Enriched by the advice that allowed him to plan his tax pay-outs while realising such yields on his money, Das slept easy that night, secure in the knowledge that his decision to sell his company would still allow him, and his daughter, to live in profit for the rest of their lives. Shyam Kumar is Head, Private Client Services, Kotak Securities |
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Mayur Das had a problem. Having hived off
the profitable company he had set up nearly four decades ago to his arch-rival, he was due
to receive the sum of Rs 50 crore as the payment for his stake in it the next week. Of
this, Rs 30 crore would be the long-term capital gains on the transaction. With the
ensuing tax liability--a whopping Rs 6 crore--sending shivers down his spine, Das'
financial advisors suggested that what he needed to do was to identify those investment
avenues that would help him plan his capital gains tax payments as well as offer him
attractive returns in the long run. Having identified his financial goals, Das approached
a portfolio management firm, which ran a specialised desk to help high net worth
individuals like him. He wanted an investment plan by which he could tuck away enough
money for his old age as well as leave enough for his daughter, who was studying in the
US. What should the investment strategy for Das be? 