Tata Consultancy Services (TCS), which is the country’s largest listed company in terms of market capitalisation, has announced India’s biggest buyback offer till date. The software major plans to buy back up to 5.61 crore equity shares at ₹2,850 per share. Assuming that 5.61 crore shares — equivalent to 2.85% of the company’s equity — are bought back, the offer size would be pegged at ₹16,000 crore, surpassing Reliance Industries Ltd.’s 2012 share buyback offer of ₹10,400 crore.
The buyback is being made through the tender offer route, which means the existing shareholders can tender their shares through the stock exchange. The buyback offer price of ₹2,850 represents a 13.7% premium to ₹2,506.50, the closing price on February 20 when the announcement was made. Since the buyback announcement, the stock has lost nearly 1% to close at ₹2,481.65 on Thursday (the stock market was shut on Friday on account of Mahasivaratri). The buyback offer price is at a premium of almost 15% over the current market price.
TCS has a cash pile of more than ₹38,000 crore as on December 31, 2016. Given the tax rules of India, a buyback is a comparatively better way of rewarding shareholders than doling out hefty dividends. While there is no additional tax in buyback, dividends come at a cost to the company and the shareholders. There is a dividend distribution tax of more than 20% on the companies while individuals have to pay 10% tax if dividend received is more than ₹10 lakh. Most software majors are facing a slowdown in business due to the overall global macroeconomic factors, coupled with potential restrictive policies of the U.S., which accounts for the largest chunk of dollar revenue. Incidentally, the business model is such that it generates a lot of cash and sector heavyweights like TCS and Infosys have a significant cash balance. All these factors make this the ideal occasion to reward shareholders with an attractive buyback offer.
The buyback offer is at a decent premium to the market price and, simply put, shareholders can gain from the premium. Indian equity shares, while touching recent highs, have been quite volatile in nature, leading to an uncertain outlook. In such times, investors can seriously look at a sureshot gain in the form of the buyback offer. Further, since the equity shares that are bought back are extinguished, the company’s financial metrics, including earnings per share and return on equity, will improve. However, since the buyback offer amounts to only 2.85% of the equity, the value accretion would not be significant. Interestingly, the buyback offer would matter the most for Tata Sons — the holding company of the diversified business conglomerate — if it looks to unlock some value from its 73.26% stake in the software major, which is also its biggest contributor in terms of dividend income.
The mega buyback offer and the response to it could lead to more such offers, mostly from the IT space. Infosys is seeking shareholder approval for amending its Articles of Association to include the provision of buybacks — as mandated by the new Companies Act. The postal ballot notice of Infosys on the amendment states: “Power to purchase its own equity shares or other securities by way of a buyback arrangement has been included and provisions relating to nomination facility for shares by a shareholder have been inserted.”
While Infosys looks seriously at a buyback, other Indian majors such as Wipro, Tech Mahindra and HCL Technologies might be still some time away from such offers because of the lower levels of cash and a historical trend of inorganic growth. The board of NASDAQ-listed Cognizant has also approved a plan to return $3.4 billion to its shareholders over two years through buybacks and dividend. The NYSE-listed Accenture Plc has a history of returning all its profits to its shareholders in the form of buybacks and dividend payouts.
