Some of the biggest companies in the IT sector- Cognizant, and TCS – have offered a buyback of shares from their
shareholders. And the latest news suggests that Infosys may follow the same path set by its competitors.
So, why have buybacks become so popular? Read on to find out 5 important things you should know about buybacks
whether you are a shareholder of these companies or not.
So what about these buybacks?
The Cognizant board recently approved a plan to return $3.4 billion (Rs 22,725 crore*) to its shareholders. They wish to do
this over the next two years through buybacks and dividends. Following this announcement, TCS came out with a buyback
offer of Rs 16,000 crore. And with a buyback offer of Rs 17,000 crore, Infosys is not to be ignored. *$1 = Rs 66.84.
Reason for these buybacks
Buybacks have been on the rise in recent times. But in India, the trend has gathered steam especially after Budget 2016-17.
The Dividend Distribution Tax (DDT) imposed by the government could be a big reason. Investors have to pay 10% DDT if
their dividend income exceeds Rs 10 lakh per annum.
Why they matter to investors
Buybacks are a common way for companies to distribute excess cash to shareholders. For existing shareholders, buybacks
are often good news. They reduce the supply of shares in the market. This ensures that the earnings per share increases for
Should you participate in the buyback?
Participate in the buyback only if it is profitable to you. Take note of the offer price before you commit to the buyback. This
is because you only gain if the offer price is significantly higher than the market price. In addition, the quantum of money
you receive should be substantial too. For instance, only three out of 100 shares are accepted for buyback by TCS.
Companies generally opt for buybacks when they have surplus cash. TCS has a cash pile of around Rs 38,000 crore as of 31
December 2016, as per a report by The Hindu. This could also be an indication of a lack of growth opportunities for the
company. For investors, buybacks are most attractive when it occurs at a premium over market price and the quantity of
buyback is big.
For investors, a buyback can sometimes mean a big downpour of cash. So make sure you make a substantial profit when you
sell your shares.
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