The proposed merger of Sapphire Foods India with Devyani International carries significance not only for India’s quick-service restaurant (QSR) landscape but also for thousands of retail investors who
own shares in either company. Although the transaction has been structured as a tax-neutral merger, shareholders need to understand how capital gains will be calculated when they eventually sell the shares they receive after the merger.
Sapphire Foods announced on Thursday that it will merge with Devyani International, bringing the Indian franchise operations of Yum! Brands-owned chains such as KFC and Pizza Hut under a single listed entity. The consolidation comes at a difficult phase for fast-food operators, as slowing same-store sales and margin pressure weigh on the sector amid cutbacks in discretionary spending due to higher living costs.
What the merger means for shareholders
Under the proposed scheme, Devyani International will issue 177 shares for every 100 shares held in Sapphire Foods. Once the merger becomes effective, Sapphire Foods shareholders will no longer hold SFIL shares and will instead receive Devyani International shares based on this swap ratio.
The integration of the two businesses and the realisation of projected synergies is expected to take 15–18 months from the effective date of the merger. Ahead of this consolidation, group company Arctic International will acquire about 18.5 per cent of Sapphire Foods’ paid-up equity capital from the existing promoters, with an option to later assign this stake to a financial investor.
For shareholders, however, the more immediate issue is taxation—specifically, whether the share exchange triggers capital gains and how the cost of acquisition will be determined for future sales.
No capital gains tax at the time of merger
The merger has been structured to qualify as a tax-neutral transaction under the Income Tax Act. As a result, shareholders will not be liable to pay capital gains tax when their Sapphire Foods shares are exchanged for Devyani International shares.
Explaining this, Balwant Jain, a Mumbai-based tax expert, said that there are no capital gains implications at the time of the merger. Tax liability arises only when an investor subsequently sells the Devyani International shares received under the scheme. For this purpose, the original purchase cost of Sapphire Foods shares will be apportioned across the Devyani shares received in the 177:100 ratio, and capital gains will be calculated using this adjusted per-share cost.
In essence, the merger itself does not trigger taxation; capital gains are taxed only at the time of sale.
How the cost of acquisition will be calculated
For capital gains computation, the cost of the Devyani shares received will be derived by proportionately allocating the original cost of acquiring Sapphire Foods shares across the number of Devyani shares received under the swap.
For example, if an investor bought 100 Sapphire Foods shares at Rs 300 per share, the total investment cost would be Rs 30,000. Under the merger, the investor would receive 177 Devyani International shares. The cost per Devyani share would therefore be Rs 30,000 divided by 177, or Rs 169.49 per share.
When these Devyani shares are eventually sold, capital gains will be calculated as the difference between the sale price and this adjusted cost per share.
Treatment of the holding period
The holding period is another key consideration. For tax purposes, the holding period of the original Sapphire Foods shares will be carried forward to the Devyani International shares. This means that if the Sapphire shares were held for more than 12 months, any gains on the sale of Devyani shares will qualify as long-term capital gains (LTCG).
Accordingly, LTCG will be taxed at 12.5 per cent on gains exceeding Rs 1.25 lakh in a financial year, without indexation. Short-term capital gains will be taxed at 20 per cent.
Key takeaways for investors
While the merger itself does not result in an immediate tax outgo, shareholders should carefully preserve records of the purchase price and acquisition date of their Sapphire Foods shares. These details will be essential for accurately computing capital gains in the future.
For long-term investors, the consolidation could unlock operational synergies and scale benefits. From a taxation standpoint, clarity on cost allocation and continuity of the holding period helps ensure there are no unexpected tax implications when investors decide to exit their holdings.
