Majesco Limited, the Indian listed company sold its US subsidiary to a private equity fund Thoma Bravo L.P. for a gross cash consideration of INR 3778 crores. As Majesco Limited does not have any other business, the board announced modes (buyback +dividend) to distribute net cash of INR 3072 crores (after adjusting capital gains on the sale of shares of US Subsidiary) to its shareholders.

INR in crores

Particulars No. of Shares Gross Outflow Tax Net Consideration Net Consideration per share Taxation type
Transaction 1
Sale of shares of US Subsidary 3778 731 3047 Capital gains to Majesco Ltd
Transaction 2-Distribution of Net Gains
Buyback @ INR 845 per share 0.75 778 147 631 Tax to be paid by Majesco Ltd
Balance for dividend
(Assuming applicable tax rate of 30%)
2.24 2269 681 1588.3 Tax to be paid by shareholders*
3,778 2,219 742.7

Please note that above working is without considered amount payable to shareholders out of other surplus assets of the company. Further, net amount in the hands of shareholders will get reduced by tax on dividend as per the marginal tax rate applicable to them and increased by any tax break on capital loss to the extent other taxable capital gain.

Capital Loss per share:

Particulars Amount
Investment Amount 882
Per share value after proposed distribution (Assumed) 25
Capital Loss 857

Effectively, the amount invested as a capital i.e. cost of shares will be returned to the shareholders in the form of revenue income creating income tax charge and generating capital loss.

Instead of buyback, if management would have decided to go for distribution of the entire amount as a dividend or capital reduction (face value of share), gross receivable from Majesco Limited would have been marginally higher. Net of tax will depend on the tax rate applicable to each shareholder, though most likely small shareholders might have benefited.

Returns for Shareholder who bought shares recently:

Particulars Amount
No. of Shares bought on 12.10.2020 1,000
Share price 882
Purchase Cost 8,82,000
Buyback of shares 250
Amount Received through Buyback 2,11,250
Dividend Received 7,67,682
Total amount received 9,78,932

Considering the current pricing, one can expect a pre-tax return of circa 11% in the next 2-3 months. However, if we compute the post-tax returns, the picture will be totally different.

Particulars Amount
Dividend Income Received 7,67,682
Marginal Rate of Tax Applicable (Gross) 30.0%
Net Gain 5,37,377
Total Amount Received (Dividend +Buyback) (post-tax) 7,48,627
Net Loss -1,33,373

Considering this, from the direct taxation perspective, it may be better for the shareholders who have bought Majesco Limited much below the current market rate to sell the shares in the open market through exchanges to realise better net gains.

Main Contributor: Anirudha Jain (Linkedin, Twitter)

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