Promoters of the country’s second-largest information technology (IT) services company, including founders Nandan Nilekani, N.R. Narayana Murthy, S.D. Shibulal and S. Gopalakrishnan would have to shell out more tax and earn less money in hand if they were to sell their shares through the buyback than through the stock exchanges. Currently, the promoters and their group own 13.05% of the company’s shares.
On 11 September, Infosys announced that it would repurchase 100 million shares at a price of ₹1,800 per share. It ended Thursday with a share price of ₹1,529 per share, which translates to an apparent gain of ₹271 per equity share.
“However, the tax implications arising on such buy-back of shares in the case of Indian shareholders would likely be more than the premium offered by the company under the proposed buy-back scheme. That is possibly one reason that large shareholders could be opting out of the buyback,” said Ketan Dalal, managing director of Katalyst Advisors, a Mumbai-based boutique structuring and advisory firm.
According to a July 2024 amendment to the Income Tax Act, “any payment made by a company on purchase of its own share from a shareholder in terms of section 68 of the Companies Act, 2013, is to be deemed as dividend income.”
Key Takeaways
- The primary reason for Infosys promoters skipping the ₹18,000 crore buyback is a January tax amendment that treats buyback proceeds as dividend income.
- Selling shares on the open market allows the promoters to treat the income as Long-Term Capital Gains, subject to a lower effective tax rate applied only on the gain, not the entire sale amount.
- Despite the buyback’s ₹271 premium over the market price, the higher tax makes an open-market sale more profitable for the long-term shareholders.
- Some analysts interpret the decision as a sign of strong conviction by the founders that the stock’s true value is greater than the buyback price of ₹1,800.
- The promoters’ non-participation will lead to an increase in their post-buyback shareholding and is expected to raise the acceptance ratio for retail shareholders who choose to participate.
This implies that the entire amount of ₹1,800 received by the shareholder through the buyback will be considered as dividend income in the hands of the shareholder. This does not consider the price at which the promoters bought the Infosys shares.
Taxing times
Sample this.
If a shareholder earns more than ₹1 crore annually, the effective tax rate on the shares would be 35.88%, which includes a base tax of 30% as per their income and the remaining as surcharge and cess. This implies that the shareholder would end up with ₹1,154 in hand for every share.
However, if the shareholders take an alternative route and sell these shares in the open market on the stock exchange, the income will be chargeable as capital gain. The promoters are long-term shareholders of the company and hence, the applicable tax rate would be 14.95%, which includes a long-term capital gains tax of 12.5% and the remaining as surcharge and cess.
This tax would apply to the difference between the selling price and the price at which the shares were purchased by the promoter. This means that if the promoters bought Infosys shares for ₹95 in 1993, the tax applies on ₹1,434. Shareholders will now receive ₹1,220 for every share, more than the amount they would have received by selling shares through the buyback.
This also means that the long-term shareholder, in this case the promoters, would stand to lose money despite the ₹271 premium over the current price as of 23 October.
Katalyst’s Dalal added that taxes on selling shares in the stock exchange could further reduce. “Grandfathering of FMV (fair market value) as on 31 January 2018 is also available, which would reduce the capital gains tax even more for those who have bought shares before 2018.”
Grandfathering for long-term capital gains is a provision protecting investors from being taxed on gains that accrued before a new tax law came into effect, prior to which capital gains on listed shares was exempt for several years.
The company said its promoters were opting out of the buyback in an update to the stock exchanges on Wednesday.
Buyback calculations
“In terms of the Buyback Regulations, under the tender offer route, the Promoter and Promoter Group have the option to participate in the Buyback. In this regard, the Promoter and Promoter Group of the Company have expressed their intention of not participating in the Buyback vide their letters dated 14 September 2025, 16 September 2025, 17 September 2025, 18 September 2025 and 19 September 2025,” said the company in an update to the stock exchanges on 22 October.
To be sure, the dates of the buybacks are yet to be announced.
Emails sent to Nandan Nilekani, N.R. Narayana Murthy, S.D. Shibulal, and S. Gopalakrishnan on Thursday went unanswered until press time.
While one expert pointed at a tax hurdle, at least two analysts said that money was not the primary driver in the promoters opting out of the buyback.
“This is a good sign in my view. This decision to not opt for the buyback also shows strong conviction on the stock’s fair value being higher than ₹1,800. It also means that the promoters aren’t afraid that AI (artificial intelligence) would batter their share prices,” said Abishek Kumar, equity research analyst at JM Financial.
Infosys shares have fallen 18.7% since the start of the year, amid rising concerns that AI is eroding the revenue of the country’s largest IT services companies, as automation tools replace human workers and lead to lower billing.
A second analyst said that more people would subscribe to the buyback.
“Not just will the shareholding of the promoters increase, but also will the acceptance ratio amongst retail shareholders,” said Amit Chandra, vice-president of HDFC Securities.
Shareholder participation
Assuming all eligible shareholders take part in the buyback, the aggregate shareholding of the promoters and members of the promoter group after the completion of the buyback shall increase to 13.37% from 13.05% of the pre-buyback total paid-up equity share capital of the company (as on the date of the public announcement).
This is the Bengaluru-based company’s fifth buyback in eight years. Earlier, Infosys spent ₹13,000 crore on its first buyback in 2017, followed by ₹8,260 crore in 2019, ₹9,200 crore in 2021, and ₹9,300 crore in 2022.
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