Bengaluru-based Infosys had announced Rs 13,000-crore share buyback on 19 August, 2017, offering Rs 1,150 per share to purchase around 4.92 percent of the stocks held by the shareholders. Incidentally, it coincided with the climax of Narayana Murthy-Vishal Sikka spat that culminated in the latter's resignation.
Buyback evokes strong emotions among the cognoscenti and the market watchers. Though it is extremely popular in the US as a form of rewarding the shareholders, questions have been raised in India about its desirability with often company promoters shaking in their boots at the imminent prospect of a hostile takeover using the buyback route to beef up their tenuous shareholding so as to halt the marauding acquirer in his tracks. Critics have given their thumbs down to such cynical misuse of the buyback regime to help the promoters stay in the saddle without incurring any financial burden as the depletion of reserves and cash is borne by the company.
Buyback is recommended when a company has no immediate growth prospects and therefore it should return the money to the shareholders. It is the preferred option vis-à-vis cash dividend because the latter exposes a company to dividend distribution tax (DDT) which stands at a hefty 20 percent including cess.
Moreover, individuals and HUF receiving Rs 10 lakh or more of dividend have to pay individually a 10 percent tax resulting in a 30 percent tax on dividend if DDT paid by the company and 10 percent tax paid by the shareholders are added. On the contrary, the profit made by a shareholder when his shares are bought back by a company is treated as capital gains. And in case of a listed company, which Infosys is, shares qualify as long-term capital assets if they have been held for more than just 12 months giving a complete reprieve from taxation. That is why the buyback route is supposed to be tax-friendlier. Small wonder Infosys promoters have made a pitch for it vis-à-vis a one-time or special dividend. Of course non-promoter shareholders too would benefit from the buyback but the truth is they would be riding piggyback on promoters.
It however takes a heavy toll on company finances. Take the case of Infosys. The company is paying a heavy price of Rs 13,000 crore to bring down the number of outstanding shares by 4.92 percent. The move may improve its future earnings per share (EPS) marginally even though admittedly the company has a formidable war chest of Rs 39,335 crore as on 30th June 2017.
The company has notified the Bombay Stock Exchange that some of its promoters would be taking part in the buyback program which means they would be returning some of their shares to the company for cancellation in return for the hefty payment of Rs 1,150 per share as against the current market quotation of around Rs 938 representing a premium of 22 percent over the market price. This sends the depressing signal that these promoters themselves are taking a bleak view of the company’s future in terms of growth prospects.
There are company promoters who stay away from the buyback offer and instead buy shares from the market through the creeping acquisition route to send out a positive message -- I have faith in the company I have promoted. Be that as it may.
It is certain that the buyback program of Infosys would sail through as there is no imminent prospect of a sudden surge in the fortunes of the company that would be reflected in its quotations. A buyback fails when the market price catches up with or overtakes the buyback price. It is not likely that the Infosys quotation would catch up with Rs 1,150 during the period when the buyback is on.
It is worth mentioning in the end that Apple frequently resorts to buyback in the US and still finds money to finance its new products and versions. It seems to be an exception to the general rule that buyback signals end of the road insofar as future opportunities are concerned. It obviously makes profits hand over fist so as to be able to afford the luxury of both buying back its own shares as well as invest in new products and ventures.
Updated Date: Aug 29, 2017 17:25 PM