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A Majesco Opportunity

While a lot has been said about avoiding the trap that is the Dividend being paid by Majesco, there's a special opportunity for those below the taxable limit.

Background:

Majesco has announced a dividend of INR 974 per share. The Company has been trading between the INR 965 to INR 974 level for the past few days.


Note that record date for payment of Dividend is 25 December 2020


Why such a ridiculous amount of Dividend? The company decided to sell the business. This is essentially a liquidation payout. There's tons of articles on the internet on why this is happening. Long story short, below are the facts:

  • Majesco trades between INR 965 to INR 974.

  • Majesco’s US subsidiary was listed on the Nasdaq.

  • The US subsidiary was bought over by a US PE fund- which leaves it with a post tax figure of roughly INR 3072 cr.

  • The company is distributing Dividend of INR 974.

  • There will be no business left at the end. The Company will be left with just a 120,000 sq. ft. commercial real estate (land and building) in Mahape, which they intend to sell after the lockdowns. That should generate about INR150 cr. or so – which is about INR 50 per share.

The focus of this article isn't why they are doing this or the ethical rightness or wrongness of it. We are here to focus on the unique tax opportunity this gives to a certain class of people.


Who does this help?


This article is of use to you ONLY if you (or anyone from your family) has income below INR 5,00,000 (or INR 6,80,000 if you assume Section 80C and Section 80D deductions). If this is not the case, the rest of the article is hogwash. Just stop reading then.


Unique Tax Situation


This Majesco situation has resulted in a really unique tax situation which could theoretically be exploited.


Here's what someone having zero other income can do:

  • Purchase shares of Majesco at INR 965 per share (say 500 shares). Cash Outflow - INR 4,82,500

  • Hold these shares till the record date.

  • Receive Dividend on these shares Cash Inflow - INR 4,87,000

  • Risk free income - INR 4,500

  • Once the share price hits ~INR 50, sell shares to record Capital Loss of ~INR 910 per share. Approximate Tax Benefit (assuming set off against STCG on equity) - INR 68,250

Before we proceed, we hear you screaming DIVIDEND STRIPPING at us. So let's address the first elephant in the room:


Dividend Stripping:

Note that since dividend is now taxable, the section on dividend stripping does not apply anymore. Dividend stripping applied only when the dividend was exempt.


While dividend is taxable, it would be at slab rates. If your total income is below INR 5,00,000 (or INR 6,80,000 if you assume Section 80C and Section 80D deductions), you end up paying zero tax.


The loss that you claim, can be set off against capital gains in the future.

It can't be this easy, can it? It's not.


Issues

  • The Majesco situation is unprecedented and no one is quite sure how this will unfold. Currently, it appears as if the market is ascribing zero value to Mahape real estate.

  • If regular circuit filters apply, it may take 2-3 months for the stock to reach the value of INR 50.

  • Even when the value of share reaches INR 50, there may be no buyers. Exit would become very difficult at this point.

  • We cannot be sure that there would be buyers for the stock even if the share price reaches INR 1-2.

Even if exit is not possible, there could be a small amount of risk-free money to be made. The major benefit is definitely out of the capital loss that you can book, however, it's not as straight forward like we point out above.


Tread cautiously. Think twice before you make any moves here. There's small amounts of money to be made - but only for a few lucky investors.

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