The board of Tata Consultancy Services or TCS will take a decision today, which also happens to be the last day of Natarajan Chandrasekaran as the CEO, on share buyback. Chandrasekaran, who is also known as 'Chandra', will resume his role as the chairman of Tata Sons from tomorrow onward. Rajesh Gopinathan will replace Chandrasekaran as the chief executive officer and managing director at TCS from tomorrow.
Here are the main things to know about the share buyback:
- Earlier this month, IT services major Cognizant Technology Solutions Corp, announced that it would do share buybacks worth $3.4 billion over two years. The announcement came even as Infosys squashed speculations that it was considering a Rs 12,000 crore share buyback program.
- No sooner had Cognizant announced a $5 billion share buyback and dividend payout that there was a clamour for Indian IT majors TCS, Infosys, Wipro and HCL Technologies to liquidate their cash hoard through a share buyback programme.
- While share buybacks in itself isn't anything new, this is not a common phenomenon in the till recently fast growing IT services sector. Most technology services companies enjoyed double-digit growth rates till recently. However, technological shifts and changes in buying patterns have meant that their growth prospects have dimmed considerably, with most of them recording barely double-digit growth. In the past, companies required large amounts of capital as they kept adding people and business. That isn't true anymore. Cognizant by implementing a buyback seems to be concurring with this assessment on growth prospects.
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- Activist shareholders, who are demanding better returns, are forcing companies to extinguish shares through buybacks. This will also ensure better value for the remaining shareholders. And will impose better capital discipline on companies who have not been doing anything with large piles of cash. This will force them to do M&A deals or return money. As Pai points out that Infosys Market Capitalisation has barely gone up in the last 5 years.
- Share buyback is a more tax efficient way of distributing earnings of the company. While dividends under Rs 10 lakh are not taxable in the hands of shareholders, companies have to pay tax on dividends. A share buyback program is a more tax efficient way of distributing earnings from a company's perspective.