Majesco, a 7-year-old listed Indian software company announced a massive dividend of ₹974, almost 20,000% of its face value. Currently, the share trades at ₹974.60 on NSE. The ex-date for this dividend would be 23rd December 2020 and 25th December the record date. The dividend payout translates to a massive ₹2,788 crore cash outlay for Majesco.
Why so generous with the dividend?
The company had previously been paying dividends in the range of ₹1-₹2. Once the company had sold its stake in its US subsidiary, Mastek, it pocketed nearly ₹3200 crore and it led to a cash accumulation of ₹1028 per share. Earlier this year, the company had completed a massive buyback at ₹845 per share.
Once the dividend has been paid out, the company says that it would still be left with ₹103 crore and a bit of real estate. The company has plans of selling the real estate and distributing the same to the shareholders. Once this has been done, the company would go in for delisting.
First, let us understand what dividend stripping is. Mr.A buys a stock before the dividend date, pockets the dividend, and then sells the shares at the ex-dividend price. The fall in share price entitles Mr.A to claim a loss. This can be set off against the capital gains in some other transaction.
However, dividend stripping laws have been tightened over the years. When the shares paying out a dividend are bought or sold 3 months prior to the record date of the dividend, then Sec 94(7) of income tax 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.
Does it make sense for you?
Due to the high dividend payout, it is expected that Majesco shares would trade in single digits post the payout. Dividend over ₹5,000 is subject to a TDS at the rate of 7.5%. This amount is added to your income and taxed at the relevant tax slab. For most high-income individuals the rate of tax would be 30-40% and this is also subject to a surcharge.
A smarter way to pocket the gains and pay lower taxes would be to sell the shares in the open market before the dividend date. The gains on this sale, would be taxed at 15% if held for less than a year and at 10% if the shares have been held for longer than a year and the gains are less than ₹100,000. This is still much lower than the 30% at which the dividend would be taxed at if you are in the higher tax slabs.