TCS Board to Consider Fourth Buyback of Shares

If early reports are to be believed, TCS is likely to consider its fourth bonus share issue when the board meets to approve the Q3 results on 12th January. In an exchange filing TCS had reported that the board would consider a buyback proposal at its 12-Jan board meeting.

Buyback of shares has been popular among the large IT companies in India like TCS, Infosys, Wipro and HCL Tech. In a buyback, the shares of the company are bought back using the cash reserves of the company and the outstanding shares are extinguished.

Since the outstanding shares are reduced, the same profit of the company gets distributed across fewer shares which enhances the EPS of the company and also the valuations. For companies with limited investment options, buyback is a good way of rewarding shareholders.

In the case of TCS, the company is sitting on cash reserves of Rs.51,950 crore as of the last quarterly results declared for September 2021. With that kind of cash, buyback would be more value accretive for shareholders than paying dividends. 

From the perspective of promoters, dividends are also tax inefficient. Firstly, dividends are taxed at the peak rate of incremental tax and the actual cost is much higher in effective terms since dividend is already a post-tax appropriation, unlike interest paid.

In the US, companies are allowed to do buyback of shares for extinguishing shares and also for holding in treasury. However, the Indian Companies Act only permits buyback of shares for the purpose of extinguishing the shares and not for treasury purposes.

In year 2017, year 2018 and year 2020, TCS had done buybacks of Rs.16,000 crore in each of the years at different prices, based on the prevailing price at that point of time. The markets are expecting another buyback of a similar amount in the year 2021 too.

The company is expected to announce the other details of the buyback like the record date, the buyback price, the number of shares being bought back and the value of the buyback after its board meeting scheduled on 12th January.

The markets have generally been divided over the issue of whether buybacks really add value. One argument is that buyback is an indication that the company does not have too many investment opportunities. That is not a factor that is conducive to growth.

However, as we have seen in the case of IT companies, buybacks have been a prudent and shareholder friendly method of distributing wealth to the shareholders in a more tax efficient manner. It certainly is an EPS booster.

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