TCS has announced a share buy back at its board meeting on 20th Feb.
The board has approved a proposal to buyback up to ~5.61 crore shares for an amount not exceeding Rs 16,000 crores. The buyback price will be at Rs 2.850. The number of shares bought back will be 2.85% of the total paid-up capital.
Why do companies buy back their shares? Why TCS?
Companies can use their profits
1. Use for new capex / investments to grow the business
This is done if the project returns gives an ROE that is near current levels
2. Pay out dividend
If no more cash is required after the capex/investments
3. Keep the cash and invest in money market instruments
Keep excess cash
As the cash pile increases, companies can pay out more dividend. Dividend is taxable before the payout (in India).
A share buyback is a market operation and signals to the market that the value of the company is more than the current market price and this is a way to pay out cash to the shareholders in a tax efficient way.
Shareholders can tender their shares through a broker. Only a proportion of shares will be accepted by TCS. This will be in proportion to their holding and the number of shares tendered to TCS.
For every 100 shared one holds, assuming all tender their shares, 2.85 shares will be purchased by TCS @ Rs 2850/-
For the shareholder, if Securities Transaction Tax is paid, there is no Long Term Capital Gains applicable if they have held the shares for more than one year.