Tata Consultancy Services (TCS), India’s renowned IT giant, is poised to embark on its fifth share buyback program in the span of six years. This strategic move is expected to not only benefit TCS but also bolster the financial health of its parent company, Tata Sons. The nine-member board, under the leadership of Chairman N. Chandrasekaran, who also holds the chair at Tata Sons, is scheduled to convene on October 11 to discuss the proposal. This initiative comes at a time when Indian IT companies are navigating a challenging demand landscape, particularly in the United States, their primary market.
The Upcoming Buyback Proposal
Analysts speculate that TCS’s upcoming share buyback may surpass its 2022 repurchase endeavour, which amounted to Rs 18,000 crore. Prashanth Tapse, Senior VP (Research) at Mehta Equities, suggests, “We anticipate the upcoming share buyback to be in the range of Rs 19,000-20,000 crore, marking a 6-11% increase compared to last year’s repurchase program.”
Stock Performance Pre-Announcement
Prior to the buyback proposal’s announcement, TCS’s stock recorded a closing price of Rs 3,620 apiece on the BSE, reflecting a 0.9% increase. TCS has been actively involved in share buybacks since 2017, with four repurchase schemes amounting to a total of Rs 66,000 crore. In the same vein, earlier this year, two other prominent IT companies, Infosys and Wipro, successfully concluded their share repurchases, with amounts totaling Rs 9,300 crore and Rs 12,000 crore, respectively.
TCS’s Commitment to Shareholders
In fiscal year 2018, TCS made a commitment to initiate stock repurchases with the goal of distributing 80-100% of its free cash flows to its shareholders. As of June 30, 2023, TCS possessed a substantial cash and cash equivalent reserve of Rs 60,942 crore.
Benefiting Tata Sons
This move by TCS also serves as a conduit to channel funds back to its promoter, Tata Sons, which holds approximately 72% of the IT unit. Tata Sons is currently diversifying its investments into new ventures, such as semiconductors and electric vehicle batteries. In fiscal year 2023, Tata Sons received dividends totaling about Rs 30,000 crore from TCS.
Tax Implications
Abhishek Mundada, a partner at Dhruva Advisors, points out that while both dividends and buybacks are subject to taxation, in the case of a buyback, the company is liable to pay a 23% tax on the difference between the buyback price and the share subscription amount received at the time of the issue of such shares. Consequently, all buyback proceeds received by shareholders remain tax-exempt, making this an attractive avenue for both TCS and its investors.
