InvestorQ : Will Tata Sons increase its stake in TCS and as an investor, should I opt for the offer?
Priyanka N made post

Will Tata Sons increase its stake in TCS and as an investor, should I opt for the offer?

Neelam Naik answered.
9 months ago

There are two issues that you have raised and they are not necessarily related to each other. The issue of promoter stake is more of a control issue and has little to do with your returns. That is more of a taxation issue, which I will come back to later.

On the question of what happens to the promoter holdings after buyback, it would entirely predicate on whether Tata Sons participates in the buyback or not. If Tata Sons chooses to participate in the buyback offer, then their post buyback stake would remain the same.

However, if Tata Sons chooses to skip the buyback, then the stake of Tata Sons will go up by 104 basis points from 72.05% to 73.09% due to the reduced capital of the company. This could also be a control creation mechanism over TCS.

In fact, Tata Sons may not look to participate in the offer as it would be keen to tighten control on TCS, which is the biggest cash cow of the group, ahead of the Mistry family selling its stake in Tata Sons. That gives the Tata group more leverage in bargaining.

Coming back to the attractiveness, you must look at taxation issue. After July 2019, buybacks are taxed on the company at the difference between the issue price and the buyback price. Buybacks will not be taxed in the hands of the investor.

That is not good news because it is a standard hit on all investors irrespective of whether you participate in the buyback or not. For example, as small investors, you may be better off getting dividends and paying lower taxes commensurate with your income levels.

Buyback payouts essentially favour promoter shareholders. Investors need to decide quickly whether they should exit the stock since the market price is very close to the buyback price. It may be a tax-efficient choice if you look at it logically.