TCS buyback program gets bumper oversubscription

As of the penultimate day of the TCS buyback program on 22nd March, the TCS buyback had already been subscribed around 5.5 times. The Rs.18,000 crore buyback had opened on 09th March and will close on 23rd March.

However, as of the close of 22nd March, nearly 22 crore shares had been tendered by shareholders against the total quota of 4 crore shares, implying an oversubscription of buyback by nearly 5.5 times. It is likely to increase by close.

The buyback was for 40 million shares (4 crore shares) at a buyback price of Rs.4,500 per share aggregating to Rs.18,000 crore. The buyback was already attractive as the company was buying back shares at a substantial premium to the market price.

Even as of the close of Tuesday, the penultimate day for the buyback, the market price of TCS stood at Rs.3,706; which means the buyback was still 21% above the market price.

Of course, this would mean that only proportionate applications for buyback would be accepted. According to reports, the buyback acceptance could be around 14.3%, which means one out of every 7 shares may be accepted for the buyback.

However, this would only be for the retail reserved portion. In the non-retail portion, the acceptance ratio is expected to be around 1 share of every 108 shares held. 
 

This is the fourth buyback that TCS has done in the last 5 years and it is likely to be the lowest acceptance ratio. In the first three buybacks, the acceptance ratio was 100% but that is more because the gap between the market price and the buyback price was not as large as the current occasion.

Also, on previous occasions, the stock was in the midst of a rising trend, while this time around, the stock has been stagnating for some time.

One of the reasons the buyback is extremely popular is the very attractive tax treatment of buyback proceeds. Unlike dividends that are taxed in the hands of the individual at the peak rate of tax, the buyback is only subject to tax on the company at 23.296%.

However, the buyback gains are tax-free in the hands of the shareholder. This has turned out a lot more economical and tax efficient for the promoter groups.

Buybacks are normally done by companies that are cash rich and do not have avenues to deploy resources in the form of investments, inorganic acquisitions etc. That is the reason IT companies have been in the forefront of doling out buybacks for the benefit of shareholders.

Clearly, as the acceptance ratio goes down, the lure of buybacks for the shareholders may reduce. That is something or buying back companies to keep in mind.

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TCS buyback offer - opportunity for retail investors