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|
|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*|
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:
|Per share value after proposed distribution (Assumed)||25|
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:
|No. of Shares bought on 12.10.2020||1,000|
|Buyback of shares||250|
|Amount Received through Buyback||2,11,250|
|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.
|Dividend Income Received||7,67,682|
|Marginal Rate of Tax Applicable (Gross)||30.0%|
|Total Amount Received (Dividend +Buyback) (post-tax)||7,48,627|
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.