The Tata Consultancy Services board on Monday approved a proposal to buy back 5.61 crore shares at Rs 2,850 apiece. This works out to 2.85 percent of the company’s equity base. The buyback will be done under the tender offer route on the stock exchange. TCS shares rose a little over 4 percent to close at Rs 2,506.50 following the announcement.
Last week, the company’s outgoing chief N Chandrasekaran had told CNBC-TV18 that the company had a large cash balance and the board was considering the possibility of a buyback. But what exactly is a share buyback? Here’s a quick primer to get you up to speed on the basics: WHAT IS A SHARE BUYBACK? It is when a company offers to purchase shares from the shareholders and extinguish those shares. This reduces the equity base of the company. WHY DO COMPANIES OPT FOR A BUYBACK? It can be for a variety of reasons. But usually, companies announce a buyback when they either feel their shares are undervalued or when they have no better investment plan to deploy the cash. A buyback is a way to return cash to shareholders. WHY A BUYBACK TO RETURN CASH, WHY NOT A DIVIDEND? A buyback reduces the equity base of the company. This pushes up earnings per share, as the same profits will now be divided by a smaller equity base. (EPS=Net profit/number of outstanding shares) HOW DOES A HIGHER EPS HELP? It helps boost the share price.
Because the market values a stock based on its EPS. IS A SHARE BUYBACK ALWAYS A GOOD THING? Not exactly. While many consider a buyback to be a low risk way to deploy extra cash, there are downsides. It’s often used as a ploy to boost earnings and could well mean that company undertaking the exercise has run out of good ideas. WHY IT COMPANIES? IT firms are sitting on a large amount of cash. Sentiment for the sector has soured in recent months as the business environment has become tough. Also, the proposed measures by the Trump administration is expected to hurt the profitability of IT companies further. TCS’ buyback plans come amid rising concerns that IT companies are struggling to invest in good ideas in a growth-challenged environment.
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