A merger is a corporate action in which two or more companies combine to form a single entity. In the Indian stock market, mergers can impact shareholding patterns, cost of acquisition, ISINs, and tradability. For investors, understanding how mergers are executed and how shares are credited and valued is essential.
What Happens During a Merger?
In a merger, the shares of the transferor company (the company getting merged) are cancelled, and shares of the transferee company (the surviving entity) are issued in a specific ratio. The merger ratio is usually announced in advance and approved by regulators and shareholders.
Timeline of Share Credit and Tradability
- Record Date: Determines eligible shareholders of the merging entity.
- Credit to Demat: Post record date, it typically takes 10–20 working days for new shares to be credited.
- New ISIN Allotment: The transferee company issues shares under a new ISIN. These shares are not immediately tradeable.
- Tradeability: It usually takes an additional 5–10 working days for the shares to become tradeable after credit.
Note: Investors can check their demat account for credited shares and verify tradeability status with their broker or NSDL/CDSL portals.
Example: HDFC Ltd and HDFC Bank Merger
In July 2023, HDFC Ltd merged with HDFC Bank. Shareholders of HDFC Ltd received 42 shares of HDFC Bank for every 25 shares held.
Case: Suppose an investor held 100 shares of HDFC Ltd purchased at ₹2,500 each (total investment ₹2,50,000).
Post-merger, they received 168 shares of HDFC Bank.
The cost of acquisition per HDFC Bank share = ₹2,50,000 / 168 ≈ ₹1,488.10
Cost of Acquisition Rule
When shares are received under a merger, the cost of acquisition is derived from the original purchase price of the old shares. This cost is then allocated to the new shares received in the merger, based on the swap ratio.
This is important for calculating capital gains when the shares are sold in the future. Holding period of the original shares is also carried forward to the new shares for taxation purposes.
Taxation of Merged Shares
Mere receipt of shares due to a merger is not a taxable event. However, capital gains arise when you sell the newly received shares. These gains are calculated using:
- Acquisition Cost: Based on original investment as allocated to new shares.
- Holding Period: From date of acquisition of original shares (HDFC Ltd in the above case).
- Capital Gains: Taxed as STCG or LTCG depending on the holding period.
Impact on F&O (Futures & Options)
Generally, the F&O contracts are settled or adjusted by the exchange when a merger affects traded stocks. Fresh contracts in the name of the transferee company are introduced after the merger becomes effective.
Key Takeaways
- Understand the merger ratio and monitor official announcements
- Expect credit of shares in 10–20 working days post record date
- Shares may take extra time to become tradeable under the new ISIN
- Always recalculate your cost of acquisition for accurate capital gain reporting
With ProStocks, stay informed about major corporate actions like mergers and their implications. A well-informed investor makes better tax-efficient decisions and avoids surprises in portfolio valuation.
Disclaimer: Investments in securities market are subject to market risks. Read all related documents carefully before investing. ProStocks is a SEBI registered stock broker (INZ000048231). This blog is for informational purposes only and does not constitute investment advice.
