TCS Buyback 2022: All you need to know!

TCS announced a buyback of its shares worth Rs 18,000 crore at Rs 4,500 per share on 12th January. Let us look at what it means for TCS shareholders.

What is a buyback and why does it happen?

A buyback is a process where a company buys its shares from the existing shareholders at a price higher than the current market price. The primary reason for the buyback is that the company has excessive cash. It does not have any expansion plan or acquisition to make. Hence, it uses the extra cash to buy its own shares.

One may wonder - if the cash is excessive, companies can announce dividends as well. If a company announces a dividend, it has to incur dividend distribution tax. To avoid that, a company does not always take the dividend route.

What is the TCS buyback offer?

TCS, the largest IT company, generates free cash flow every year. This year, it decided to use the cash to buy shares from existing shareholders worth Rs 18,000 crore. The total number of shares the company will buy is 4 crore or 1.08% of the total shares. The buyback price is Rs 4500 per share.

Who can buy the shares at Rs 4500?

Only those shareholders that hold the shares on the 'Record Date' will be eligible to sell their shares to the company at Rs 4500. Second, if you are a retail investor, you can sell your shares during the buyback process. A retail investor holds less than Rs 2,00,000 worth of the company's share. Investors should keep an eye on the record date as it is not yet announced.

Can I sell all my shares?

No. During the tender process, the company decides how many shares it will accept from the retail shareholders. It is decided by the Acceptance Ratio. 

Acceptance ratio is the no of shares accepted in a buyback against the total no of shares tendered. Sebi mandates that 15% of the total buy-back size be reserved for retail investors. In most cases, the acceptance ratio for retail investors is higher.

Should I sell my TCS shares?

The company announced the buyback on 12 January when the share price was around Rs 3850. Currently, the price is over Rs 4000. Since the record date is not announced yet, investors should wait for it and see the price near to the record date.

Investors who invested in TCS with long-term views should not tender their shares now. From the current levels, the difference is only around 10-12%. 

With the strong Q3 number, the company is expected to do well. Edelweiss Research in a note to clients said - “We believe demand for core transformation remains strong, and this coupled with exemplary execution is likely to drive strong earnings."

However, if you invested for the short-term and you already had plans to sell the TCS share for decent gain, you can explore the tender offer to sell your shares.