The share price of Majesco Limited closed at Rs 985.85 on December 22 (Tuesday). On the next day, investors were quite confused why its share price had fallen by around 98% to Rs 12. The reason behind the decline is very interesting and quite rare in the stock markets. marketfeed has come up with an easy explanation for all our readers. Let us dive right in.
The Huge Dividend Payout
We often come across news about companies announcing or declaring dividends, which is a specific ‘reward’ that is offered to its shareholders. The dividends paid by Majesco in recent years had been in the range of Re 1 to Rs 2 per share. However, on December 15, we received a piece of very interesting news from the company. Majesco Ltd announced that its Board of Directors had approved payment of interim dividend at the rate of 19,480% for the financial year 2020-21! This means that the company will pay Rs 974 per equity share of the face value of Rs 5 each.
This interim dividend payout translates to an amount of Rs 2,788.4 crore, on a shareholder base of 2.8 crore shares. This has been the highest dividend payout ever declared by an Indian firm.
Why Has Majesco Declared Such a High Dividend?
The main reason for this is because the insurance technology firm had sold one of its business units- Majesco US- to Thoma Bravo, a private equity firm. The sale proceeds after accounting for expenses and capital gains tax had been Rs 3,853.3 crore! On the other hand, the company had already completed a buy-back of shares at Rs 845 per share. Thus, the company had a lot of cash accumulated in its financial books.
Thus, Majesco’s board declared a special dividend and announced that the record date for the dividend payout will be made on December 25, 2020. It also stated that the ex-date would be December 23, 2020.
What is Record Date and Ex-Date?
- The record date refers to the cut-off date used to determine which shareholders of a stock are entitled to a dividend. It is set by the board of directors of a company.
- An ex-dividend date (or ex-date) of a stock is dictated by stock exchange rules and is usually set to be one business day before the record date.
- In order for an investor to receive a dividend payment on the listed payment date, they would need to have their stock purchase completed by the ex-dividend date.
- If the stock sale has not been completed by the ex-dividend date, then the seller on record is the one who receives the dividend for that stock.
On the ex-dividend date, the stock price is adjusted or reduced by the amount set as dividend. This means that the stock is now being traded without the value of the next dividend payment. On December 23, Majesco’s shares turned ex-interim dividend for Rs 974 per share. On the same day, the stock gained nearly 5% to close at Rs 12.20.
If you are interested in buying a specific share for its attractive dividends, there are certain details that you need to be aware of:
- Dividends received are taxable in the hands of the receiver, as per the applicable tax rate. For those in the higher tax brackets, the rate of tax is in the range of 30-40%. This means that a High Net-worth Individual (HNI) would have to pay a very high tax for their dividend received.
- Also, dividends in excess of Rs 5,000 are subject to tax deduction at source (TDS), at the rate of 7.5%.
- On the other hand, an existing shareholder who is planning to sell the stock would attract a long-term capital gains tax of 10% or a short-term capital gains tax of 15%.
- Certain people may buy a stock before the dividend, pocket the dividend, and sell the shares at an ex-dividend price. The fall in share price entitles you to claim a loss, which you can set off against capital gains earned in some other transaction. This is actually known as dividend stripping. However, 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. To claim a loss, one has to buy the shares at least three months prior to the record date and sell them three months after the record date.
Now you know what really happened with Majesco’s shares! We would urge our readers to always be aware of the implications behind such a huge piece of news such as this.