Ranbaxy-Daiichi deal hits a regulatory bump

Mumbai: Ranbaxy Laboratories' deal to sell its promoter stake to Japan's Daiichi Sankyo would now have to take an off-market route, as the market regulator, the Securities and Exchange Board of India (SEBI), has turned down a proposal to close the transaction through a block deal on the stock market.

Daiichi, Japan's third largest drug maker, meanwhile, completed acquisition of an additional 20 per cent stake in Ranbaxy, but delayed payment as the SEBI had disallowed the promoter stake deal.

The promoter stake sale would now have to be executed through an off-market deal, in which case the Ranbaxy promoters would have to pay capital gains tax of around Rs1,000 crore over the 34.8 per cent stake sold to Daiichi Sankyo.

Daiichi had acquired over 34.8 per cent stake in Ranbaxy for Rs9,576.3 crore, in June this year, at a negotiated price of Rs737 per share from Ranbaxy promoters. However, Ranbaxy's share price has since come down to Rs266, down 64 per cent, following problems with US regulators.

Ranbaxy had sought Sebi's approval to execute the deal at Rs737 a share through the stock market. SEBI, however, denied permission because of the huge difference between the deal price and the current market price.

A block deal must be done at a price which is close to the existing market price and between 9.55 am and 10.30 am on a trading day. A Sebi circular issued in September 2005 says that a trade with a minimum quantity of 5 lakh shares or having a minimum value of Rs5 crore, executed through a single transaction on the stock exchange, will constitute a block deal.

At Rs737 per share, Ranbaxy is expected to pay a total of Rs6,820 crore ($1.4 billion) for the 20 per cent holding plus interest amounting nearly 1 billion yen due to the payment delay.

Daiichi Sankyo had warned earlier this month of a valuation loss on its holding of Ranbaxy shares in the year to March.

Unlike a stock market deal which would have cost Ranbaxy promoters a nominal securities transaction tax of 0.125 per cent in addition to broker's fee and 12.5 per cent service tax (on the broker's fee), which could run into a few crores. an off-market deal attracts a 10 per cent long-term capital gains tax in addition to 1 per cent surcharge and an additional 3 per cent tax on the surcharge.

Any transaction routed through the stock exchanges do not attract capital gains tax.

Ranbaxy may now have to go back to the Cabinet Committee On Economic Affairs (CCEA) to get approval for an off-market transaction since the latter's approval was for a transaction through the stock exchange.