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The HCL Tech buyback is complete. Out of every 220 shares, 148 shares have been accepted, and the rest will come back to you. This implies an acceptance ratio of 67% of your shares.

Effectively, you bought HCL Tech shares at about Rs. 860. For 220 shares you paid Rs. 1,89,200. Today you would have received Rs. 1,48,000 (148 shares bought back at Rs. 1,000 each). The remaining 72 shares will come back tomorrow. If sold at the current price of Rs. 840, you will receive Rs. 60,480.

That’s a total amount of Rs. 2,08,480 i.e. a profit of Rs. 19,280.

On your investment, that’s a 10.2% return in three months.

We started this buyback on April 3, 2017 (see post). The idea was to buy HCL Tech at the market price and tender all shares in the offer. The record date was May 25 (a very long time, as they saw delays in permissions) and the tender offer closed on Jun 23. You had to tender all your shares, not just the 82 you were guaranteed.

Between the record date and the offer opening, the price went to Rs. 900 and fell back to Rs. 830. We’ve closely tracked this on Slack, and we’ve marked a buy price of around 860. Many of you would have bought at much lower, leaving you with higher returns.

There were way too many people with this information, apparently. You would typically get a 100% acceptance, but this time the buyback saw too many people applying.

How does oversubscription work?

The concept is that if you have 220 shares, then 82 shares were guaranteed. Meaning they would definitely take 82. Now you tendered 138 shares more. Other people also tendered more. Some people probably tendered less.

So after giving everyone their guarantee, the small shareholder list had extra shares available for a buyback from people who didn’t tender, either from ignorance or lack of time. This extra would be distributed among all those who tendered more. So for every 138 shares that were tendered above the guaranteed portion, only 66 shares were accepted. Meaning a 48% allocation for the extra shares you offered.

This might sound confusing, but if buybacks get more and more popular, the 48% will keep falling. Till now, all our previous buybacks saw a 100% return, including TCS, which we had only suggested informally on Slack.

This tells you something: The buyback arbitrage trade is getting crowded. What worked in the past, will not work in the future. But till it does, we’ll keep looking. And like Capitalmind always does, we’ll find the next set of opportunities too…

Here’s our buyback history:

We saw a 10% return in such an arb in Bharti Infratel in June 2016.

Then, a BEL arbitrage gave us about 8%.

We closed the Jagran deal at 4% in Feb 2017.

The 13% in MPhasis closed our first buyback year at 35%.

And now, 10% in HCL Tech (this post)

A Tax Note: This profit will be hit with short-term capital gains tax. And there is STT paid, so you will pay about 15% of the profit to the government as tax. A reasonably safe trade making a net 8.5%, post tax, in three months, is not too bad. But if you still want to save tax, you can use Bonus Stripping (see post) or participate in whatever’s left in the Bonus Stripping Portfolio (see post).

Now, tell them about it: