Infosys soars on buyback talk, but how long will buzz last

Written by fe Bureau | Mumbai | Updated: Aug 7 2014, 15:20pm hrs
The Infosys scrip advanced to a five-month high on Wednesday on reports that three former officials had urged the company to buy back shares worth R11,200 crore from the open market and rectify investors perception towards the company, which has been dethroned by rival TCS over the past 2-3 years.

The scrip ended the day at R3,574.70 per share, up R70.45, or 2.01%, from the previous close. In contrast, the 30-share Sensex declined nearly 1%. The IT-major touched a high of R3,604.50 intra day.

The buyback, if executed, will be the first since Infosys went public in 1993 and the biggest by an Indian company. At the recommended price and target amount, the company may buy back 2.90 crore shares, representing 5.06% stake of the total outstanding shares as on quarter ended June 2014.

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Analysts, however, said dolling out huge amounts of money on buyback may not restore investor confidence even though the plan appears ambitious. In addition, the premise of supporting the share price and wealth creation may be short lived.

Former officials TV Mohandas Pai, V Balakrishnan and DN Prahlad highlighted the need to announce a large and consistent buyback programme to show confidence in the management and the business model. The trio sought a price of R3,850 per share, a premium of nearly 10% from the previous close, in a letter to Infosys board on June 29.

However, the company has no immediate plans to launch its buyback programme, said an Infosys spokesperson.

The company has never approved a buyback. It is true that Infosys is underperforming its peers, but buyback is not the way for the company. We are recommending clients to stay invested because we expect a turnaround in business... The risk-reward appears favourable going forward, said an IT analyst with a US-based brokerage firm, not willing to be quoted.

Buybacks do not necessarily help sustain the share prices of companies for a very long period. For instance, RIL which announced a record R10,440-crore buyback in 2012, saw its share price drop 16% within a month from the closure of buyback. It managed to acquire 32.2% of the shares targeted.

Ditto in the case of DLF, Zee Entertainment and Reliance Infra. The stock price of these companies declined 10-35% after their respective buyback period ended and with limited success in share repurchases from the public.

As a result, Sebi strengthened buyback regulations in June 2013 to safeguard public shareholders as many companies were found misusing the buyback route to jack up share prices. Also, some companies never repurchased shares despite keeping the buyback offer open to public shareholders.

Sebi made it mandatory for companies to buy back 50% of the earmarked funds from 25% earlier. In addition, it also increased the gap between two buybacks of a particular company to one year instead of six months.