Fine Gael's bid to part compensate investors who lost money in Eircom raises serious questions, writes Investment Editor, Mary Canniffe
Fine Gael's plan to give tax relief to individual investors who lost money by investing in Eircom could mean a windfall of about €220 for someone who bought 1,000 shares when Eircom was floated in July 1999.
But the plan raises some serious issues. What would it mean for future flotations of State-owned companies? Would the precedent oblige future governments to compensate retail investors if share prices fell? The Fine Gael refund is based on an assessment that the Government "seduced" investors into buying Eircom shares while concealing from them the information that the Eircom board had recommended a price lower than the €3.90 flotation price. If Fine Gael enacts legislation to make the refund, could this admission by the State lead to a spate of compensation claims from former Eircom shareholders for far more than their investment loss?
Fine Gael plans to give small investors tax relief at the standard rate on their Eircom losses - they would get back 20 per cent of the amount lost. Calculation of the actual loss will be based on when each individual bought their shares and when/if they sold the Vodafone shares received when Eircom sold Eircell.
The simplest case would be the one where the shareholder bought at the flotation and exited the full investment when Valentia took over Eircom - when the shareholder would also have had their Vodafone shares. For shareholders who have not yet sold their Vodafone shares the full loss has not yet crystallised - some loss may be recovered if the Vodafone price improves.
Most shareholders bought in at the flotation at €3.90. In May 2001, when Eircell was sold, Eircom shareholders got Vodafone shares worth about €1.45 for the equivalent of each Eircom share and they retained their Eircom shares. In December, they got €1.33 for each Eircom share when Valentia took over the fixed-line business (the €1.365 price included a 3.5 per cent dividend.
Assuming the Vodafone shares were sold around the time they were received - the loss would be more if sold in recent weeks - an Eircom shareholder would have got back about €2.77 of their €3.90 Eircom investment, a loss of 28 per cent or €1.13 a share.
Under Fine Gael's tax relief plan each such investor would get an income tax refund of 22.6 cent a share. Where shareholders have not yet sold their Vodafone shares, their loss for Fine Gael tax relief would have to be apportioned.
It could be done along the lines of the recent Revenue rules for apportioning Eircom losses for capital gains tax relief (CGT). To reduce their CGT bill, investors with other shares can offset losses on shares they sell against profits on other shares sold. But this tax advantage is only available to investors who hold shares in more than one company. Some 488,000 bought Eircom shares when the company was floated on the stock market in July 1999. The shares were sold at €3.90, at the time a 30 per cent premium on the average price of European telecoms shares. Advisers to the Government and Eircom differed in their flotation recommendations, from a high of €4.30 to a low of about €3.50.
Some 50,000 to 60,000 retail shareholders had sold out before the Valentia deal. Some made a profit. The shares rose to a high of €5 in weeks of the flotation - a shareholder with 1,000 shares who sold at this level would have made a profit of €1,100 or 28 per cent.