TCS share buy-back

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.

 

Bond Basics #2

A basic coupon bond has the following features

  • On issue date, initial bond face value is paid to issuer (investor buys a bond)
  • Regular coupon payments received by investor (represents the interest)
  • At maturity, bond face value is redeemed (returns the loan)

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An illustration

  • Consider a coupon bond with a face value of $100,000;
  • Bond maturity: 5 years
  • Coupon Rate: 4%;
  • Coupon Payment: Semi-annual
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Why is it called a bond coupon? Read more at Coupon

Most governments raise a lot of debt (short, medium and long term) to finance investment and expenditure.

Some basic government bonds

Gilts (UK)

  • A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange
  • The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security
  • This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due
  • These have a maturity of 5, 10, 30 and 50 years

US Treasury – Bills, Notes and Bonds

The US treasury issues a number of securities to raise money required for various government program

These are three key types of securities

  • Treasury Bills (T-Bills) have a maturity of < 1 year
  • Treasury Notes (T-Notes) have a maturity of 2, 3, 5, 7 and 10 years
  • Treasury Bonds (T-Bond) have a maturity of 30 years

Japanese Government Bonds (JGB)

JGB’s are issued by the Japanese government, which is responsible for interest and principal payments

Payment is guaranteed by the Government

  • JGB’s are a financial product traded in the market. So, you don’t need to wait for maturity.
  • The principal amount will be paid at maturity
  • Maturities can vary from 2 to 40 years

Government Securities and Types

Selected Countries

FI Country Bonds

 

The next topic will be on Fixed Income Security types and features.

Bonds Basics

A bond is a borrowing (or lending) and is a loan in structure.

Let us look at a loan transaction.
Lender: Gives Money. For a period of time. At a rate of interest.

Borrower: Borrows for this period of time. Has to pay regular interest and finally the principal amount at maturity.

fincome 1

What are the challenges?

Lender does not get his money till maturity – Liquidity Risk
This is the chief problem in a loan transaction which is one to one (OTC).
Borrower may default – Credit Risk. We will look at this later.

What is a Bond?

A bond also called a Fixed Income Security .

  • A bond is a financial security that promises to pay a fixed income stream at fixed dates in the future
  • Issued by governments, state agencies municipalities and corporations
  • When a corporation or government wants to borrow money, it often sells a bond

 

So we have the issuer of a bond (borrower) and the investor of the bond (lender)

Key Features

The borrower promises to give the investor:

  • Regular interest or coupon payments every period until the bond matures.
  • The face value of the bond when it matures

Bonds are characterized by

  • Maturity date
  • Face, par or principal value
  • Interest Rate (or Coupon Rate)
  • Number of interest payments per year (typically 2; also called coupon payments)

Loans are classified by the initial maturity or tenor of the borrowing

Fincome Loan types

Loans are also classified by the Issuer of the loan

Fincome Issuer

Combining the two we see a loan has two key principal characteristics – issuer and duration of borrowing

Fincome IssuerMaturity

What are the benefits of bonds to investors?

  • Investors receive ‘coupon’ also known as the interest payment.
  • On maturity, investors receive back the principal which they had originally invested
  • Depending on the quality of the borrower, the investor derives a measure of comfort regarding the safety of his investment.