TCS announces ₹18,000 cr share buyback. What it means for investors

Tata Consultancy Services (TCS) on Wednesday announced that its board has approved buyback of shares worth up to ₹18,000 crore, according to an exchange filing.

"The Board of Directors at its meeting held has approved a proposal to buy-back up to 4,00,00,000 equity shares of the company for an aggregate amount not exceeding ₹18,000 crore being 1.08% of the total paid up equity share capital at 4,500 per equity share subject to approval from shareholders," TCS said in a filing.

The buyback will be executed at a premium of ₹643 from the current share price.

This is TCS' fourth buyback since 2017 and first for any company in the current calendar year. The company has approved share buybacks worth ₹16,000 crore each in 2017, 2018 and 2020.

On Wednesday, ahead of the results, TCS scrip closed 1.50% lower at ₹3,857 apiece on NSE. In the last one year, the shares have surged by 21.37%, underperforming the Nifty IT Index which gained 25.02% in the same period.

What is a share buyback and what it means for investors

Share buyback, or share repurchase, is when a company buys back its own shares from investors or stakeholders. It can be seen as an alternative, tax-efficient way to return money to shareholders.

Buybacks are attractive in tax terms even after considering the 10% tax on long term capital gains (LTCG).

Usually, companies go for share buyback if it wishes to increase demand in the market. Share buybacks reduce the number of shares in circulation, which can increase the share value and the earnings per share (EPS).

When a company buys back shares, it results in a reduction of the number of shares outstanding and the capital base. To that extent, it improves the EPS and the ROE of the company. When the EPS goes up, assuming the P/E remains constant the price of the stock should also go up.

Typically, Indian IT companies like Infosys, TCS, Wipro and HCL Tech have a lot of cash and it has a cost. Therefore it is better the cash is returned to shareholders through a buyback.