What is likely to be the size of the TCS buyback offer expected on 12-January?

In a release to the stock exchange, TCS has announced that the board of TCS would consider a buyback of shares when it meets on 12-January to consider its December quarter results. It will also take call on the amount of interim dividend payable. It now looks like TCS will consider its fourth bonus share issue in as many years along with its results filing on Wednesday. However, buybacks are nothing new and it has been the biggest in India.

Buyback of shares has very popular among the large IT companies in India like TCS, Infosys, Wipro and HCL Tech. The reasons are not far to seek. Most of these tech companies are extremely cash rich and sitting on piles of cash. In addition, the buyback of shares using cash reserves of the company results in the outstanding shares getting extinguished. That is value accretive to the shareholders, something Berkshire Hathaway has done to perfection.

That is because, Indian companies are only allowed to do a buyback of shares to reduce the share capital. Treasury with buyback is not permitted in India. This enhances valuations but there is a more important aspect. Buyback are a more tax efficient method of rewarding shareholders since dividends are not taxed at the peak rate of tax and if you consider that dividends are a post-tax appropriation, the actual effective cost is even higher.

TCS is also sitting on a pile of cash with not much needed by way of investments in its core business. Instead of investing these funds in treasury instruments, it can be more accretive for the company to buy back shares. After all, the company is sitting on a huge cash reserve of Rs.51,950 crore as of the last quarterly results declared for September 2021.

If you look back, TCS had done buybacks worth Rs.16,000 crore in the years 2017, 2018 and year 2020. On a thumb rule, it is expected that TCS would retain a similar amount of buyback in this year too and the number of shares would approximately depend on the indicative price arrived at. TCS is expected to announce other details like record date, quantity and price after the actual announcement on the date of the board meet

Just one final word I would like to add here since investors want to know if these buybacks really add value to shareholders. The markets have been divided over this issue. One argument is that buyback indicates that the company does not have too many investment opportunities. That is not too good. However, for IT companies in particular, buybacks have been a prudent and shareholder friendly method of distributing wealth.