Infosys buyback: Good deal for small shareholders

At the current price, Infosys’ buyback offers a good arbitrage opportunity for small shareholders. But given that the stock may see a relief rally on Monday with Nandan Nilekani returning and joining as the non-executive chairman, arbitrageurs may need to watch out, if the stock moves beyond ₹1,000.

The acceptance ratio in the offer is likely to be about 60 per cent as the small shareholders have a 15 per cent reservation in the buybacks that are done through the tender offer route.

In a concall with analysts on Friday, Ranganath, CFO, allayed fears of the board rethinking on the buyback and said that the postal ballot process to get approval of shareholders will start soon.

Infosys’ buyback is through the tender offer route where the shares from investors are accepted on a proportionate basis. So, the probability of raking in gains depends on the acceptance ratio. This ratio denotes the proportion of holdings an investor can actually sell in the buyback.

As per the SEBI’s buyback regulations, there is a reservation for small shareholders to the extent of 15 per cent of the number of equity shares which the company proposes to buyback. It defines a ‘small shareholder’ as one who holds equity shares having market value on the record date of not more than ₹2 lakh.

Now, in Infosys’ case, the total buyback is for 11.3 crore shares. This is 4.92 per cent of the outstanding shares of the company. But, given that there is a 15 per cent reservation for small shareholders, the acceptance ratio for this category works out to about 60 per cent. Here’s how.

As on March 31, Infosys had about 6.27 lakh shareholders who held about 2.87 crore shares with the holding value of ₹2 lakh or less. Of the total buyback of 11.3 crore shares, the 15 per cent reservation for small shareholders comes to 1.69 crore shares.

If we assume that, as on the record date too, the company has small shareholders who hold more or less the same number of shares, then the acceptance ratio (assuming all those shares are tendered in the offer) is 1.69 divided by 2.87 which is 59 per cent.

However, in practice, not all shareholders may tender the shares in the buyback.

In the TCS buyback, for instance, the acceptance ratio originally appeared to be about 45 per cent for small shareholders. The company had 1.87 crore small shareholders as of the record date and the reservation in the buyback for them was 84.21 lakh shares.

But, during the buyback, only 41.97 lakh small shareholders actually tendered their shares and hence all of it was accepted.

In the case of HCL Technologies too, the acceptance ratio turned out higher. As on the record date of 25th May for the offer, the stock of HCL Technologies traded at about ₹859.60 and investors with 232 shares or less who were the eligible small shareholders held about 1.41 crore shares.

Of the 3.5 crore shares under buyback, the 15 per cent reserved for small shareholders worked out to 52.5 lakh shares. So, the acceptance ratio came to 37 per cent. However, during the offer, only 78.7 lakh shares (of the eligible 1.4 crore) were tendered and the acceptance ratio jumped to 66.69 per cent.

In the case of Infosys too, the final acceptance ratio could vary depending on how many shareholders tender their shares.

There could be a good arbitrage opportunity for small shareholders (whose holdings as on the record date does not exceed ₹2 lakh) in the buyback.

Say, you buy 100 shares of Infosys at the market price of about ₹900. Of this, if 60 shares are accepted in the buyback at ₹1,150 per share, and you offload the balance 40 shares at close to ₹900 itself, you will make a return of around 17 per cent. The short-term capital gains tax of 15 per cent will reduce the profit, but it will still not be a bad deal.

Arbitrage profit will go up if the final acceptance ratio is higher. Suppose, of the 100 shares you tender, 80 is accepted, you can rake in a higher 22 per cent return.

There will be a loss only when you lose all the profit made on the shares tendered in the buyback on the balance shares sold in the market.

Taking the earlier example, say, you bought 100 shares in the market at ₹900 each. Then, you tender these 100 shares in the buyback, and 60 shares are accepted. The 60 shares would have given you a profit of ₹15,000. So, unless the market hammers the stock to ₹525 or lower, you will still make some profit from the trade.

The 60 per cent acceptance ratio calculation is based on the number of small shareholders and their holdings as on March 31. If this number changes by the record date and there are more shares that qualify for the small shareholder reservation, then, the acceptance ratio may drop below 60 per cent.

Traders who are eyeing arbitrage profit in this buyback have to keep in mind a few other things too. One, it takes two days for the stock to come to the demat account from the date of purchase. So, if one wants to trade on the buyback arbitrage, “he has to ensure that there is a clear three to four working days to the record date, so that his name is in the register of members of the company for sure by the record date”, says Amit Agarwal, Partner, Nangia & Co.

Second, after the date of closure of the buyback, it can take about seven to eight days for the final declaration of accepted shares, adds Amit Agarwal. So, you cannot sell your shares immediately. In the mean time, even if market price goes up, you cannot take advantage of it.