In FY18, 41 companies completed their share repurchase offers worth Rs 49,067 crore. Of this, buyback offers by seven IT services companies accounted for Rs 44,984 crore or 92% of the total sum. The buyback of TCS, the largest IT company by market capitalisation and revenue, which concluded in May 2017, was the biggest in the past two decades. The IT major repurchased shares worth Rs 16,000 crore.
TCS’s offer came a week after US-based software services player Cognizant Technology Solutions, which has centres in India, announced plans to buy back shares worth $3.4 billion.
Infosys concluded its buyback worth Rs 13,000 crore on December 2017. Wipro completed its buyback worth Rs 11,000 crore on December 2017. Mphasis, Nucleus Software, HCL Technologies and Mindtree are the other IT companies which bought back shares in FY18.
“IT companies have huge surplus cash which they are not able to deploy. In the last three years, IT industry has slowed down in terms of overall revenue growth. So there has been a lot of shareholder pressure on IT services companies to return cash to shareholders. If you see Cognizant in the US, they were under huge pressure from aggressive investors. Similarly, companies here have come under a lot of pressure to return cash to investors rather than just hoarding it on their balance sheet. That’s why they have decided to go in for all these buybacks,” an investment banker told FE on the condition of anonymity.
When asked about the outlook for the next year he said he expects a fair amount of buybacks in the next fiscal too.
Buybacks appear to have become the preferred route for companies to return wealth to shareholders, especially since dividend income, of over `10 lakh per annum, is taxable at 10% in the hands of all residents, domestic companies, trusts or funds except those established for religious, educational or charitable purposes.
“Buyback is the most tax efficient method of rewarding the shareholder. Those companies which have substantial cash balances, and have no plans of organic or inorganic growth and want to reward shareholders are the ones who typically come with a buyback. There were 49 buyback offers this year which includes most IT majors. I do not think that is the case next year. I do not think there are many which have that much cash to do a buyback,” said Narayanan Sadanandan, executive vice president, Capital Markets Group, SBI Capital Markets.
Buybacks are the process by which companies repurchase their shares from stakeholders. The bought-back shares are extinguished shrinking the firms’ equity base.