WHY INFOSYS PROMOTERS OPTING OUT OF BUY BACK OF SHARES DESPITE HEFTY PREMIUM OF MORE THAN RS 300 PER SHARE OVER THE PRESENT MARKET PRICE ?

 WHY INFOSYS PROMOTERS OPTING OUT OF BUY BACK OF SHARES DESPITE HEFTY PREMIUM OF MORE THAN RS 300 PER SHARE OVER THE PRESENT MARKET PRICE  ? 

FACTS 

• Infosys approved a buy-back of about 10 crore shares at ₹1,800 per share, representing about a 19-22% premium over market price at the time.  

• Infosys Ltd, has announced buy back of it’s equity shares at a price of Rs.1,800 per share as against the market price of Rs.1472 per share. 

• The promoters and promoter group have declared their intention not to participate. 

WHETHER INFOSYS BUYBACK IS ATTRACTIVE ? 

On the face of it, the buy-back is quite attractive as the co. will be paying Rs. 1,800/- per share as against market price of Rs. 1,472 & there will be an apparent gain of Rs.328 per equity share.   

DEEMED DIVIDEND 

Some finance experts have suggested that changes in tax laws, particularly the treatment of buyback proceeds as a "deemed dividend" which is taxed at the shareholder's slab rate (potentially up to 35.88%for high-income resident individuals), might make the transaction less favorable for high-net-worth resident promoters compared to the capital gains tax that would apply to a regular market sale.  

The tax outgo in the buyback scenario could potentially reduce the effective gain below the premium. 

EFFECTIVE TAX RATE ON BUYBACK IS 35.88 (30% TAX + 15%SURCHARGE + 4% CESS 

The income of the individual shareholder is apparently more than Rs. 1 crore and hence effective tax rate is 35.88 (30% tax + 15%surcharge + 4% cess), with the result that such shareholder will be liable to pay tax of Rs. 646(1800 x 35.88%) on this amount of Rs. 1,800 received in respect of equity share offered to the company under buy back scheme. The net amount, thus, in the hands of the shareholder will be Rs. 1,154 only as against market price of Rs. 1,472  . 

BUYBACK VS SELLING IN OPEN MARKET 

As against the above, if such shareholder, instead of offering the shares to the company under the buy-back, sell these shares in open market on the stock exchange, the income will be chargeable as capital gain. Assuming that the gain is long term in nature, the tax rate applicable on long term capital gain will be 14.95%(12.5% tax + 15%Surcharge + 4% cess) and that too on the difference between the selling price and the price at which the shares were purchased by such shareholder. Assuming that such shareholder had purchased the share say at a very low price before 31.02.2018 then in view of grand fathering clause cost will be considered as that of the rate on 31.01.2018 which was Rs 1,166. Accordingly the tax will be Rs.46 only. ( 14.95% of 1,472 selling price – 1166 the price on 31.01.2018),with the result that the net amount post tax in the hands of the shareholder will be Rs. 1,426/-, as against Rs. 1,154/- being the net amount post tax in case the shareholder offers the shares in the buyback scheme to the company. 

NET LOSS TO THE SHAREHOLDER 

Thus, net loss to the shareholder, in case he opts for the buy-back option, will be Rs 272 per share despite getting a premium of Rs 328 over present market price in case of buyback. 

INFOSYS BUYBACK  IS A BIG GAIN FOR NON RESIDENTS SHAREHOLDERS 

A against this Non Residents shareholders will be benefitted as Dividend is taxed at concessional rate of 5% to 20% in view of Tax Treaty.  
As promoters are opting out , the no. of shares available for buy back for non residents will get also increased . Thus buy back is a big gain for non residents. 

FINAL THOUGHTS  

The move of promoters opting out from buyback has been taken as a positive signal, and the share price reacted accordingly (jumping ~4-5%) after the announcement. 

 

Courtesy : Shri Ved Jain  

 

R V SECKAR , FCS, LLB 79047 19295