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Flipkart-Walmart deal: Why SoftBank may hold on to its stake for the next 6-12 months

BusinessToday.In     May 11, 2018

Is SoftBank, currently Flipkart's biggest stakeholder , planning to do another flip on the recent Walmart-Flipkart deal? Citing sources in the know, The Economic Times said that the Japanese conglomerate is still undecided on whether to sell its 21 per cent stake in India's leading etailer given the tax liability involved if it exits less than a year after investing in Flipkart.

On Wednesday, Masayoshi Son, chief executive of SoftBank, held a press conference in Tokyo revealing the Walmart-Flipkart deal, and disclosing that SoftBank's $2.5-billion stake in the company, picked up last August, would be worth $4 billion if it chose to exit. But a big chunk will go to the taxman.

While short-term capital gains tax in the hands of foreign investors is 40 per cent, long-term capital gains tax is levied at 20 per cent for shares sold after 24 months of purchase. "However, such applicable long-term capital gains tax rate in India could be reduced by half, if such shares acquired after March 31, 2017, are sold before April 1, 2019," said Nangia & Co Director Chirag Nangia.

"The situation is still very fluid. Soft-Bank's fund is registered in Jersey [USA] and they are suffering a huge tax liability because there is no DTAA protection with Jersey," said the source. Double Taxation Avoidance Agreement (DTAA) is a tax treaty that India has signed with many countries to help taxpayers avoid paying taxes on the same income, both in the country where it is earned as well as the country of residence. The source added that in order to avoid the short-term taxation issue, SoftBank may hold the Flipkart stake for 6-12 months.

Furthermore, SoftBank's Son, who in October 2014 had committed to investing $10 billion in India within a decade, remains bullish on the country. Another source told the daily that "Son is a big believer in India and thinks that the valuation of the company (Flipkart) can go up further", adding that SoftBank has not exited Flipkart. It will take a call on the exit in the next 10 days and discussions regarding the transaction, as well as SoftBank's role in the homegrown ecommerce company going forward, are still on with Walmart. Flipkart was been valued at about $22 billion in the buyout deal announced on Wednesday and Walmart is expecting to close the deal by the year-end.

If SoftBank decides to hold on to its stake a little longer, it will surely dent Walmart's announced plans to acquire a 77 per cent stake in Flipkart for $16 billion. Nonetheless, the US brick-and-mortar behemoth has still bagged a significant stake of around 55 per cent. Naspers sold its 11.18 per cent stake in Flipkart to Walmart for $2.2 billion. Co-founder Sachin Bansal sold his 5.9 per cent stake for an estimated $1 billion while eBay India made about $1.1 billion from its 6.55 per cent stake. Flipkart's oldest investors, Accel Partners and Tiger Global Management will exit partially - the latter's stake, in fact, will come down to just 5 per cent from 21.99 per cent.

The report added that Flipakart's remaining shareholders are cofounder and group CEO Binny Bansal (4-5%), Tencent (6%) and Microsoft (1%), while the remaining stake is held by a few small investors and employees.
With PTI inputs

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