Share buybacks at tech giants: Everything you must know in four points

NEW DELHI: Clamour for share buybacks at Indian information technology (IT) companies is set to grow louder with TCS saying its board would consider buyback of equity shares at a meeting to be held on February 20.

Recently, Cognizant too announced a $3.4 billion buyback plan. Also, there was speculation about Infosys also planning a Rs 12,000 crore share buyback which the company has denied. But several of its shareholders such as V Balakrishnan and Mohandas Pai have demanded a buyback.

1. Why shareholders demand buybacks from IT companies
Indian IT companies have had only single-digit growth recently, leading to low shareholder returns. They can be rewarded through other means such as a buyback. Cash is idling at Indian IT companies as they are neither making acquisitions nor investing in growth.

2. Can the companies afford it?
With bleak growth targets, IT companies need not hoard their piles of cash. Infosys is sitting on $4.5 billion dollars while TCS, Wipro and HCL Tech have cash piles of $5.69 billion, $4.88 billion and $1.9 billion respectively.

3. How buybacks are good
A buyback displays a company's optimism in future. It indicates the company's shares are under-valued. Buybacks are also more tax-efficient than dividends. They also help put a floor under the share price.

4. How buybacks are bad
Investors may be right in pressurising IT companies for buybacks but they may also have a negative side. Less cash with a company may discourage it from making valuable acquisitions which power long-term growth.

The company cannot issue ESOPs for a period of six months after the buyback. If a company buys shares above fair value, it can destroy value for the remaining shareholders.