Consolidation of shares
A company merging several of its shares into fewer, higher face-value shares without changing total share capital — not treated as a transfer, so the old cost of acquisition is simply apportioned.
In plain language
A stock split breaks one share into more shares of lower face value. Consolidation of shares does the opposite: the company merges several of its shares into fewer shares, without changing its total share capital. Fewer shares outstanding, each with a higher market price, but the same total value.
For tax purposes, consolidating shares is not a transfer — Section 45's charge to capital gains does not apply at the moment of consolidation. Tax only comes into the picture when the consolidated shares are eventually sold.
How it works
Cost of acquisition after consolidation. Section 55 says the cost of the new (consolidated) shares is taken with reference to the cost of the shares they came from — in practice, the total amount originally paid, apportioned across the fewer post-consolidation shares.
The workbook's own worked figures: Mr A acquired 2,000 shares of XYZ Ltd at face value Rs 100 each. The company then consolidates 2 shares of Rs 100 each into 1 share of Rs 200 face value. Mr A now holds 1,000 shares of Rs 200 face value. His cost of acquisition per consolidated share is Rs 2,00,000 ÷ 1,000 = Rs 200 per share — the same total money, spread over fewer shares.
Period of holding. Because consolidation is not a transfer, the holding period of the consolidated shares is reckoned from the date the original shares were acquired, not from the date of consolidation — though the workbook notes there is no specific statutory provision saying so in as many words; it follows from the same cost-of-acquisition logic in Section 55.
A worked example
The workbook's Example 2, Chapter 13. Mr A buys 2,000 shares of XYZ Ltd at face value Rs 100 each — a total outlay of Rs 2,00,000. The company consolidates every 2 shares of Rs 100 into 1 share of Rs 200 face value.
Shares after consolidation = 2,000 / 2 = 1,000 shares
Cost of acquisition per share = Rs 2,00,000 / 1,000 = Rs 200 per share
No tax arises at the point of consolidation itself. If Mr A later sells all 1,000 consolidated shares for Rs 350 each (Rs 3,50,000 total), his capital gain is computed against the Rs 2,00,000 cost carried over from the original 2,000 shares — a gain of Rs 1,50,000 — with the holding period measured from when he first bought the original shares, not from the consolidation date.
Why NISM asks about it
Chapter 13 (Tax Provisions for Special Cases), section 13.2, covers taxation on share split or consolidation of shares, with Example 2 as the worked consolidation computation. Expect a per-share cost-of-acquisition calculation after a stated consolidation ratio.
Common exam traps
- Consolidation reduces the number of shares and raises face value; a split does the opposite. Read the question carefully for which direction is described.
- No tax at the point of consolidation — Section 2(47)'s definition of transfer does not cover it.
- Cost of acquisition is the original total cost, divided across the new (fewer) shares — not reset to market value.
- Holding period runs from the original shares' acquisition date, carried through the consolidation.
Check yourself
1.Why does no tax arise at the time of a share split or consolidation?
- a)Because section 47 specifically exempts splits and consolidations
- b)Because splitting or consolidation is not covered within the definition of transfer in section 2(47), and section 55 carries the cost through
- c)Because the shareholder receives no new shares
- d)Because SEBI regulations prohibit taxing corporate actions
Show the answer
Answer: (b) Because splitting or consolidation is not covered within the definition of transfer in section 2(47), and section 55 carries the cost through
The workbook reasons that splitting or consolidation of shares is NOT COVERED WITHIN THE DEFINITION OF TRANSFER in section 2(47), and that section 55 provides that the cost shall be determined with reference to the cost of acquisition of the shares from which such asset is derived. It adds expressly that this is so "though there is no specific exemption provided for this purpose under section 47" — unlike amalgamations, preference conversions and stock lending, which do rely on section 47.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Consolidating and consolidated schemeThe mutual fund merger pair — the consolidating scheme is merged away, the consolidated scheme is merged into — where the exchange of units is not treated as a transfer for tax.
- Cost apportionment on split or consolidationThe rule for spreading an original cost of acquisition across new shares after a stock split or consolidation — proportionately, so the total cost paid never changes, only how it is divided.
- Cost of acquisitionWhat an assessee is treated as having paid for a capital asset — usually the price actually paid, but overridden by special rules for bonus shares, ESOPs, gifts and inherited assets.
- Consolidating planThe same transfer exemption as a scheme merger, but applied one level down — to merging two plans within a single mutual fund scheme, such as combining sub-plans of the same fund.