Softsol India Ltd., (BSE: 532344) is a small-cap IT/ITES company. They announced buyback on 14-Nov-2022 to buy 20.58L shares at Rs.170 each for total of Rs.35 Crore through tender offer. Tender offer meaning – all shareholders can tender and participate in the buyback. This is important, we will come back on this.
What is the issue then? This tiny little thing stands out in the post-buyback announcement:
Of total buyback of 20.58L shares, 19.66L were accepted from just two shareholders. 95.50% shares from just 2 people! And that too in a tender offer. This is crazy. In other words, out of 35 crore rupees earmarked for buyback, Rs.33.42 crore was paid to these two.
This is the summary of this buyback:
Now that I have your attention, let us go back to the beginning. On 14th Nov, company announces buyback at Rs.170. That day, its shares closed at Rs.157.80. The buyback is at about 7% premium to market price. Not very lucrative. We are not questioning the pricing or the quantum of the buyback but they are all connected. We will soon see how.
Background: This buyback of was relatively large as it represents 12.24% of the share capital. Its market cap on 14-Nov was 265 Cr. Meaning, this buyback was almost 13% of market cap – which is not small by any standard. Another perspective – this buyback of Rs.35 Cr + taxes is more than 3 years of Net Profit.
1: Though promoter shareholding is put at 72.42%, real ownership is much more. This is an extract from 2021-22 Annual report:
See those two large shareholders at the bottom. Cumulatively, they hold 23.57% of the company. These two large shareholders and promoter together hold 95.99%. With such shareholding, they can pass any resolution they wish to. In other words, buyback resolution would have passed no matter the price or the quantity.
2: On 23-Dec, company published this announcement in newspapers with details of buyback. Promoters have expressed their intention to participate in buyback and willing to tender upto 40.54L shares cumulatively:
We will see in later part, how much did they actually tender.
3 : Because the buyback price was so close to market price, it elicited very little response from small shareholders. As per regulations, 15% of a buyback is reserved for small shareholders. In reality, just 4.24% was actually tendered by small shareholders. As is evident from this (marked in yellow):
But the odd question is – in General category, only 5 people applied? This is just unbelievable. So technically, the portion reserved for small shareholder can now be used from General Category. Again, perfectly legal.
But wait, in the first screenshot (post-buyback announcement), we see some 19.65L shares getting accepted from two shareholders. It means, only 5,846 shares were accepted from these 3 other shareholders from General Category. Phew, talk about imbalance.
But wait again, just in previous section, we have seen other promoters expressing their intention to participate. Seems, they did not participate after all. Talk about pre-determined deals!
As laid out by regulations, 15% is reserved for small shareholder. Balance 85% for others (General Category). According to their letter of offer, general category had entitlement of 5 shares for every 47 shares held or 10.64%. However, these 2 shareholders got much more than their entitlement because other promoter entities were acting in concert and did not participate at all.
In a tender offer buyback, all shareholders have equal opportunity to tender. If tendered, their shares will be accepted in proportion to the entitlement. In this case, two things happened:
Since these two were not fully subscribed, the remaining shares were taken from the two who tendered. Which is Promoter and a large non-promoter shareholder:
It appears as if this buyback was orchestrated to provide a tax free exit to these 2 shareholders. All legal and within the bounds of law. WOW.