Why did I receive fewer Tata Motors shares than expected after the merger?

You received fewer Tata Motors shares because the company sold some of your shares to cover the Tax Deducted at Source (TDS) on the accumulated profits as of the record date, which is considered deemed dividends. Here’s how it works:

1. Expected share allocation

Let’s assume you owned 100 Tata Motors DVR shares, purchased at ₹300 each, amounting to a total investment of ₹30,000. Based on the merger’s 10:7 swap ratio, you were expecting to receive 70 Tata Motors shares in exchange for your 100 DVR shares.

2. Deemed dividend and TDS

During the merger, a part of the company’s accumulated profits was treated as deemed dividend. For instance, if the deemed dividend was ₹200 per DVR share, the total deemed dividend for your 100 DVR shares would be:

₹200 × 100 shares = ₹20,000

The company is required to deduct 10% TDS on this dividend, which comes to:

10% of ₹20,000 = ₹2,000

This TDS amount is paid to the government on your behalf. You can later claim this amount as a tax credit when filing your income tax return. The company will send you a TDS certificate to help you claim this amount.

3. Why were some shares sold?

To pay the ₹2,000 TDS on your behalf, the company sold a portion of your Tata Motors shares. If Tata Motors' share price at the time was ₹1,050 per share, the company would have sold approximately two shares to cover the TDS. Here's how that works:

₹1,050 × 2 shares = ₹2,100 (approximately 2 shares sold)

4. Actual shares received

Originally, you expected to receive 70 Tata Motors shares based on the 10:7 swap ratio. However, after the sale of 2 shares to cover the TDS, your final share count will be: 70 shares - 2 shares = 68 shares

5. What happens with extra money?

If any extra money is generated from selling fractional shares or if the shares sold fetch more than what’s needed for the TDS, the remaining amount will be credited directly to your bank account in 45 to 60 days.

6. How does this affect your purchase price?

Before the merger, you held 100 Tata Motors DVR shares bought at ₹300 each, making your total investment ₹30,000. Based on the 10:7 swap ratio, to calculate the new average price per share, divide your total investment by the number of shares resulting from the swap.

New average price = ₹30,000 ÷ 70 shares = ₹428.57 per share.

7. How will taxes work when you sell your shares?

Let’s say you sell your 68 Tata Motors shares in October 2024 at ₹1,100 per share. Here’s how taxes would apply:

• Deemed dividend tax: The ₹20,000 deemed dividend will be treated as Income from Other Sources and taxed according to your income tax rate. Since the company already paid ₹2,000 in TDS, you can claim this when you file your tax return.
• Capital gains: If you hold DVR shares for more than 365 days, the profit will be treated as Long-Term Capital Gains (LTCG). If held for less than 365 days, it will be considered Short-Term Capital Gains (STCG). After factoring in any dividends, the applicable taxes on the gains must be paid accordingly. When you sell your shares, your gain will be calculated based on your new average price of ₹428.57 per share. If you sell at ₹1,100 per share, your gain per share is:
  
  Capital gain per share = ₹1,100 (sale price) - ₹428.57 (purchase price) = ₹671.43 per share
  

For 68 shares, your total capital gain would be: Total capital gains = 68 shares × ₹671.43  = ₹45,657.24

Since you’ve already paid tax on the ₹20,000 deemed dividend, this amount is subtracted from your capital gains: Adjusted capital gains = ₹45,657 - ₹20,000 = ₹25,657

This ₹25,657 will be taxed as Long-Term Capital Gains (LTCG), and if your total LTCG for the year is under ₹1 lakh, you may qualify for a tax exemption.