Negative impact on the IT sector from an increase in minimum public shareholding and 20% tax on share buybacks
While tech/IT sector-oriented funds had emerged top performing mutual funds last year, recent sector rotation has robbed them off some gains. The IT sector has been underperforming and sectors like Infra and Banking have started outperforming since February 2019. The 2019 Union Budget has now come with more bad news for IT funds. The Mod 2.0 government’s first full-fledged union budget for FY19–20 has mooted the idea of an increase in minimum public shareholding in listed companies to 35%, and a proposal to levy a 20% tax on share buybacks. IT stocks have reacted to these announcements, throwing the spotlight on the tech sector-specific funds. Read on to know more.
Information technology (IT) funds invest primarily in technology and technology-related companies across market capitalisation. Some of the funds have the option to invest in Indian as well as global markets. Tech funds invest in companies that are expected to benefit from the development, advancement, and use of technology. The oldest and surviving fund launched in this space is Franklin India Technology Fund, followed by SBI Technology Opportunities Fund, Aditya Birla Sun Life Digital India Fund, ICICI Prudential Technology Fund and the recently launched Tata Digital India Fund. The 10-year returns from tech focussed funds are in the range of 14-20% compounded annually, showing some serious wealth creation.
The Government of India on July 5 announced a proposal to increase the minimum public shareholding in listed companies to 35%, from 25% currently; and levy a 20% tax on share buybacks. A few IT companies have a public shareholding of less than 35% – including TCS (promoter holding: 72%), Wipro (73.4%), and L&T Intotech, L&T Technology Services (75%) – and are accordingly ‘vulnerable’. This means promoters would be required to divest stakes. This means the consequent pressure on such companies to meet the new promoter shareholding norm would keep the respective stocks under pressure. The proposal is currently with SEBI and it will likely come out with well-fleshed out norms for the same. TCS, for instance, has 7-20% portfolio weight in most tech funds. The exception is ICICI Prudential Technology Fund, but it has nearly 13% money in L&T Infotech.
The second proposal of a tax on buy backs also hits the IT companies. While the government has announced the 20% tax move on buy backs to plug an important loophole, such a tax will have an effect. Analysts reckon that the impact on Wipro would be most severe (among large-caps) owing to its higher proportion of buybacks. Wipro is a 4-6% portfolio weight in some IT funds including Tata Digital India Fund and SBI Technology Opportunities Fund. The proposed tax on share buybacks is negative.
Return of top IT funds
|Aditya Birla Sun Life Digital India Fund||-2.65||-5.08||2.6||12.07||12.34||14.49|
|Franklin India Technology Fund||-2.93||-5.33||2.77||11.24||10.2||16.79|
|ICICI Prudential Technology Fund||-2.64||-5.88||2.73||11.31||11.19||20.62|
|SBI Technology Opportunities Fund||-2.55||-2.42||5.56||12.69||11.42||18.24|
|Tata Digital India Fund||-3.69||-3.9||3.87||13.33||–||–|
|As on July 9, 2019 Return over 1 years are annualized|
Given the impacts of these two Budget proposals, experts anticipate medium-term volatility in promoter-concentrated stocks such as TCS, Wipro, L&T Infotech and L&T Technology Services. If Wipro’s ability to return cash to shareholders in the form of buybacks is severely constrained, that would not go down in the market. While the IT sector witnesses a strong demand environment, the Budget it seems has added to their worries.
Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.
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