Sanjay Shah, promoter of Prudent Corporate Advisory Services, India’s fifth-largest mutual fund distributor, has made headlines with his unique gesture of gifting shares to employees. Shah plans to distribute shares worth Rs 33 crore among 650 employees, including some staff engaged at his home, to celebrate his 25 years in business. The planned gift involves 175,000 shares, representing 0.4 per cent of his stake in Prudent.
Regulatory hurdles and exemption
However, Shah encountered an unexpected regulatory challenge. As per Indian securities regulations, recipients of gifted shares from a promoter must be classified as members of the promoter group. Shah, 58, opposed this classification, arguing that it would alter Prudent’s promoter holding structure and mislead investors. He emphasised that the recipients were neither key managerial personnel nor met promoter criteria.
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Shah approached the Securities and Exchange Board of India (Sebi) seeking an exemption. He contended that reclassification would diminish the value of the gesture and discourage promoters from rewarding employees from personal wealth. After considering his arguments, Sebi granted an exemption, clarifying that the decision is specific to this case and should not set a precedent.
Shah’s approach stands out in corporate India, where employee rewards typically come in the form of stock options. A similar instance occurred when IDFC First Bank’s CEO, V Vaidyanathan, gifted shares to office staff, house helps, and drivers. Unlike Prudent, IDFC First Bank lacks identifiable promoters.
Tax implications for recipients
While Shah’s gesture has been lauded, recipients may face tax liabilities. According to chartered accountant Prafulla Chhajed, any non-relative receiving a property gift exceeding Rs 50,000 will be taxed under ‘other income.’
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“I wanted to surprise my employees with this gift to make them feel like valued members of the company,” Shah said. He holds about 42 per cent in Prudent, valued at Rs 7,797 crore, with his family owning an additional 13 per cent, bringing the total promoter stake to 56 per cent. Prudent, listed in 2022, is trading at Rs 1,883 per share, significantly higher than its IPO price of Rs 630.
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