Majesco's Mega Dividend Announcement: Investor's Guide
On December 15, Majesco, a listed information technology firm, reported a dividend payout of an impressive Rs 974. The dividend payout of almost 100 percent, at a share price of about Rs 970, appears to be highly attractive. Also attracting tax is a significant dividend gain. Is there a way a big tax refund can be avoided? Just before big dividend announcements, can you purchase shares?
Why the massive dividend payouts?
In recent years, the dividends paid by Majesco have hovered between Re 1 and Rs 2 per share. The corporation, however, decided to sell the company. After accounting for expenses and capital gains tax, the selling proceeds led to a cash accumulation of Rs 1028 per share in her accounts. The company has already completed the purchase-back of Rs 845 shares per share. On December 15, 2020, Majesco agreed to pay a special dividend amounting to Rs 974 per share.
The company has reported that the record date for the dividend payout will be 25 December 2020 and 23 December 2020, respectively.
According to the details shared in the stock exchange notice, the company has stated that after completion of the distribution of the special dividend, there will be a cash balance of Rs 103 crore and some real estate. The firm is preparing to sell the property and transfer the money to shareholders. After that, the company can go for delisting.
“The company sold its business and since the monetization of real estate may take some time, there is no clarity on the quantum and the timelines of cash distribution, there is no strong fundamental reason why an investor should stay invested in this company or buy the share,” says Abhimanyu Sofat, Head of Research, IIFL Securities.
Why does dividend stripping not make sense?
Owing to the high dividend distribution and the fact that the share price falls in line with the amount charged, after ex-dividend, analysts expect the share price to be quoted in single digits.
At a rate of 7.5%, dividends over Rs 5,000 are subject to the source tax deduction (TDS). This amount is added to your total revenue and taxed on the slab.
For those in the higher tax brackets, the rate of tax is in the range of 30 to 40 percent and surcharge.
“To curb the revenue loss from dividend stripping, section 94(7) of income tax law restricts a person from setting off any short term capital loss (to the extent of dividend income) arising from the sale of shares purchased for dividend stripping. This is applicable when the underlying shares are bought within three months before the record date of the dividend, or sold within three months after this date,” says Akhil Chandna, Associate Partner, Grant Thornton India LLP.
So you have to purchase the shares at least three months before the record date and sell them three months after the record date to claim a loss.