Tata Consultancy Services (TCS), India’s largest IT services firm and the most valued company with a market capitalisation of over Rs 4,82,000 crore, will consider a share buyback programme next week, putting pressure on Infosys to go for a similar buyback as demanded by its former founders and directors.
The TCS announcement has come at a time when Indian IT companies are under pressure to address shareholders’ concerns, including large amounts of unutilised cash on their books. While TCS had Rs 43,169 crore cash and investments on its book at the end of December 2016, Infosys is sitting on a cash pile of Rs 35,697 crore ($ 5.25 billion) as on December 31, 2016.
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The trigger for the share buyback was Cognizant’s $3.4 billion buyback announcement recently with Indian investor groups demanding Indian IT firms should come out with similar share buyback schemes. TCS did not disclose the size of the buyback. “The board of directors will consider a proposal for buyback of equity shares of the company at its meeting to be held on February 20, 2017,” TCS said.
One of the contentious issues dogging Infosys is cash worth $5.25 billion sitting on its books and the lack of its effective use. Rather than using this cash to improve shareholders’ return, the current management rewarded certain employees with hefty compensation and severance packages. The red flag was raised days after Vishal Sikka took over at the helm of Infosys on August 1, 2014. Three former Infosys executives D N Prahlad, T V Mohandas Pai and V Balakrishnan, had shot off a letter to the Infosys board asking the company to initiate a share buyback, saying that this would help check the “asymmetry of information” between management and investors.
TCS’ outgoing MD & CEO N Chandrasekaran had on Wednesday said the company had received suggestions from investors over the need for certainty on dividend policy along with share buyback. “These two comments have come from investors and we will discuss it in the board,” he had said, adding that over the years, TCS has been increasing its dividend payments to shareholders. TCS shares on Thursday rose by 1.29 per cent to Rs 2446.90.
Last week, Infosys’ former CFO V Balakrishnan also demanded share buyback to protect shareholders’ interest. While speculation is rife that that Infosys may consider a Rs 12,000 crore share buyback, the company had declined to comment on the issue.
Firms buy back shares to increase the value of shares still available by reducing the supply of them and rewarding the shareholders with idle cash in the books. It indicates low valuation but higher optimism on the future. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares owned by enduring investors. Share buyback boosts the valuation of a stock even if it maintains the same rice-to-earnings (P/E) ratio.
When contacted, Mohandas Pai said Infosys should also go for buyback like TCS. He said he is not satisfied with the steps being taken by the Infosys board to address governance issues raised by him and other former directors.