Infosys mega buyback provides little relief for its shares
Mumbai: Infosys Ltd’s massive Rs13,000 crore buyback, amounting to nearly 5% of the company’s share capital, has barely moved the needle, as far as sentiment for its shares goes.
The company’s shares fell over 5% on Monday, taking the fall in market capitalisation to as much as $5.3 billion since Vishal Sikka quit his position as chief executive officer last Friday.
The uncertainty about leadership is clearly taking its toll, even though the buyback offers a decent arbitrage opportunity to small shareholders. The buyback price of Rs1,150 is at a huge premium of 32% to the current price, and those who fall in the ‘small shareholders’ category can buy at current levels and sell around 60% of their holdings in the buyback. Even if Infosys shares halve from current levels, such shareholders will only make marginal losses on the entire trading position. On the other hand, if the stock remains where it is, they can end up with returns of around 18% over the next three to four months.
Nimble-footed traders have been exploiting this arbitrage opportunity at regular intervals now, thanks to a pick-up in buyback offers by Indian companies. But clearly, they are no match for size and scale of institutional investors, who are running for the exit door after Sikka’s sudden resignation. There were a slew of downgrades by broking houses on Monday, resulting in heightening selling activity for the second consecutive trading session.
Securities and Exchange Board of India (SEBI) has reserved 15% of buyback offers for small shareholders with holdings worth less than Rs2 lakh. As on 31 March 2017, Infosys had 6.27 lakh shareholders in this category who together held 1.25% of the firm’s paid-up equity capital.
Given the mismatch, a much larger proportion of shares tendered by small shareholders get accepted in buyback offers, unlike institutional and other investors who typically can expect acceptance ratios of 5-10%.
Earlier this year, when Tata Consultancy Services Ltd bought back shares worth Rs16,000 crore, less than 1% of its shares were held by investors that were in the small shareholders category. If all of them had tendered their shares during the buyback, nine out of every twenty shares would have been accepted in the buyback offer. But as it turned out, less than half of those who qualified tendered their shares, which resulted in a bonanza for all who did– i.e., in the small investors’ category, all of the shares that were tendered were accepted.
It’s quite likely many small Infosys shareholders may also fail to tender their shares in the buyback for various reasons, despite the attractive premium on offer. As such, this offers a decent arbitrage opportunity for others.
But these are temporary gains restricted to a few; other investors can only hope that Infosys finds a quick resolution to its leadership crisis. Unless that happens, investor sentiment will remain weak.