Earn up to 38% risk-free returns by participating in this buyback offer

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Investors are going crazy about IPO’s and are opening up their kitties to rake in listing gains. Yet there is a risk of making losses as the issue can list at discount take the case of Windlas Biotech that got listed at a discount of 5%. On the other hand, buyback is an investment opportunity where returns can be generated with much lesser risks involved. IT consulting and outsourcing company eClerx Services has announced a buyback at Rs 3,200 per share. Read on to know more about the buyback offer and how you can earn 38% returns by participating in it.

The offer

The company in an exchange filing on August 13, 2021, said that it would buyback 9,46,875 equity shares at Rs 3,200 per share. The shares being bought represents 20.59% of the aggregate of the total paid-up Equity Share capital and free reserves of the company based on the latest standalone and consolidated audited financial statements of the Company respectively as of March 31, 2021.

The buyback will be done through the “tender offer” route and the promoters and members of the promoter group of the company will participate in the proposed buyback.

As of August 6, the promoter and promoter groups held 53.81% of the total equity capital followed by foreign institutional investors that held 18.09% stake and mutual funds owned 15.21% stake. A total of 8.32% equity is held by others.

The arbitrage opportunity

The buyback offer is at a premium of 38% or Rs 885 to its current price of Rs 2315 (3 pm on August 17). A retail investor can benefit from this arbitration as the share are trading at a discount of Rs 885/- to the buyback offer price.

As per Securities and Exchange Board of India norms 15% of the offer is reserved for retail investors with holdings up to Rs 2 lakh in the company. Hence to qualify as a retail investor one can buy a maximum of 62 shares (2,00,000/3,200 = 62).

But the acceptance ratio will change your returns. Acceptance ratio is the number of shares accepted in a buyback offer as compared to the total number of shares tendered. The below matrix will help you better understand the returns under different acceptance ratios.

Market experts are of the opinion that retail investors can participate in the buyback offer as the acceptance ratio should be around 33%.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)