Indian IT major Tata Consultancy Services (TCS) recently approved the share buyback proposal for shares worth Rs 17,000 crore. The share buyback has been set at Rs 4,150, which is at a premium of 15 per cent to its closing price on October 11, 2023, when the announcement was made.
The company will be buying back 40.96 million shares, amounting to 1.12 per cent of the total paid up share capital of the IT giant.
TCS approved a proposal “to buy back up to 40,963,855 equity shares of the company for an aggregate amount not exceeding Rs 17,000 crore,” the company said in a release.
So, what is a share buyback?
Understanding Share Buybacks
A share buyback, also referred to as a share repurchase, involves a company using a portion of its earnings to buy back its own shares from the open market. The fundamental idea behind a buyback is to increase the value of each share by reducing the overall number of shares in circulation. It is also seen as a way of giving back to shareholders.
“In keeping with our shareholder friendly capital allocation policy, the Board has recommended a share buyback,” said Samir Seksaria, chief financial officer, TCS.
TCS has previously conducted share buybacks five times in the last six years, at a similar scale.
“The buyback is proposed to be made from the existing shareholders of the company as on the record date on a proportionate basis under the tender offer route using the stock exchange mechanism,” the release added.
Tender Offer Mechanism
In a tender offer, investors submit a request to sell a portion of their shares at a buyback price predetermined by the company, which is higher than the current market rate.
Securities and Exchange Board of India (Sebi) regulations stipulate that 15 per cent of the total number of securities that a company intends to repurchase, or the number of securities allocated based on individual shareholding, should be reserved for small shareholders.
The Buyback Process
The buyback process commences after the list of eligible investors is disclosed on the record date. The company dispatches the letter of offer and tender form to eligible shareholders, who can participate even without the offer form. The offer window opens five days after dispatching the letter of offer and lasts for 10 working days. Once closed, the company verifies offers and pays accepted offers within seven days.
Interim Dividend Announcement: TCS has also revealed a second interim dividend of Rs 9 per share, payable on November 7, 2023, to equity shareholders on the record date of October 19, 2023.
Why Share Buybacks?
A share buyback can potentially boost the company’s stock price. If market conditions result in a drop in the stock price, the company may opt for a buyback, offering a premium over the current market rate to instil confidence among investors.
Meanwhile TCS’ shares are currently priced at Rs. 3,556.40, down by 1.48 per cent from the previous day 0.67 per cent over the past month. Nevertheless, the stock has exhibited a robust 9.72 per cent growth over the past six months.
Share buybacks can offer tax benefits, as investors are not subject to capital gains tax. Additionally, reducing the number of outstanding shares through buybacks can improve the company’s earnings per share (EPS), which is appealing to both existing and potential investors.
Seksaria added: “Our focus on improving employee utilisation, while driving productivity improvement and cost efficiency across the organisation, has helped us expand our operating margin to 24.3 per cent.”
The company has reported a 9 per cent year-over-year (y-o-y) increase in consolidated net profit and 8 per cent growth y-o-y in consolidated revenue for the current quarter.
