On the face of it, Infosys’ buyback offer at ₹1,150 per share, a hefty 32 per cent premium to the current market price, appears to be a good deal for existing small shareholders and arbitrageurs. But given the uncertainties and the negative sentiment surrounding the stock post Vishal Sikka’s exit, pocketing a tidy profit from the buyback may not be as clear as day.

Here’s why?

Acceptance ratio In any buyback offer, probability of raking in gains and the quantum of profit depends on the acceptance ratio. The acceptance ratio essentially denotes the proportion of holdings an investor can actually sell in the buyback.

Infosys has announced a buyback 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 in the buyback as per regulations , the acceptance ratio for this category of investors normally works out higher. As per SEBI’s buyback regulations, a “small shareholder” is one who holds equity shares having market value (on the basis of closing price on BSE/NSE), on the record date of not more than ₹2 lakh. 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. The 15 per cent reservation on 11.3 crore shares works out to 1.69 crore shares. The acceptance ratio for small shareholders, thus works out to about 60 per cent (assuming that numbers of shareholders holding shares worth ₹ 2 lakh or less, more or less remain the same).

However, in practice, not all shareholders may tender the shares at buyback. Thus the acceptance ratio could even work out higher.

In TCS, for instance, which recently finished its buyback, 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 of 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 were the eligible small shareholders who together held about 1.41 crore shares. On the 3.5 crore shares under buyback, the 15 per cent reserved for small shareholders worked out to 52.5 lakh shares. The acceptance ratio thus worked out 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.

How much profit? Even if one goes by the bare minimum acceptance ratio of 60 per cent, small shareholders or arbitrageurs will pocket a good profit. Say suppose you buy 100 shares of Infosys at the current market price of about ₹870. Of this, if you are able to sell 60 shares in the buyback at ₹1,150 per share, you may end up offloading the balance 40 shares at ₹870 (if the stock price hovers close to the current price). Hence against an investment of ₹87,000, a small shareholder would make a return of around 19 per cent. The short-term capital gains tax of 15 per cent, will reduce the profit, but, still it will not be a bad deal.

Profit may go up if the final acceptance ratio is higher. Say suppose the acceptance ratio is 80 per cent, small shareholders could rake in a higher 25 per cent return.

However, given the negativity surrounding Infosys, it is highly likely that a larger number of shareholders may tender shares at buyback. This may lead to the final acceptance ratio not rising too sharply, leaving very little on the table for investors.

For arbitrageurs, given the volatility in the stock price, betting on buyback gains can also cost them dear. If prices fall sharply from here and investors are forced to sell the balance shares at a far lower price, they may even make a loss on the trade.

Higher attrition, loss in key clients and lawsuit threat from the US are key risks to the company at this juncture.

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