The latest Rs 16,000 crore buyback announcement from Tata Consultancy Services (TCS) is the second such capital action move in less than two years. In FY17, TCS completed its previous Rs 16,000 crore share buyback at Rs 2,850 a share through the tender offer route, extinguishing 5.61 crore equity shares, representing 2.85% of its total equity. “The buyback is a capital allocation decision taken with the objective of seeking a fairer valuation of the company’s stock while improving the company’s return on equity, and increasing shareholder value in the longer term,” TCS had noted in its FY17 annual report.
Interestingly, of the 5,61,40,350 (5.61 crore) equity shares TCS bought back, Tata Sons, TCS's largest shareholder, had tendered 3,60,63,787 (over 3.61 crore) equity shares, which at Rs 2,850 a share translates to a receipt of Rs 10,278.18 crore for paring nearly 1.8% of its shareholding in TCS. The buyback process was completed and the shares were extinguished on June 7, 2017, and back then, there was no long-term capital gains (LTCG).
Earlier this year in February, the Union budget proposed that LTCG should be taxed, and equity dividend exceeding Rs 10 lakh would attract an additional tax of 10% on the recipient, which is over and above the dividend distribution tax which the dividend-paying company deducts on the gross amount. The additional tax on dividend has been imposed through the union budget of 2016.
So, when TCS doles out handsome dividends to its shareholders, Tata Sons (with 71.89% holding as of March 2018 in TCS), is taxed equally ‘handsomely’.
Over the last 14 years, from FY05 to FY18, TCS has paid out total dividend of Rs 81,841 crore (which includes equity dividends every year, and three instances of special dividends: in FY10, FY12, and FY15. With an average shareholding of 74.81% in these fourteen fiscals, Tata Sons's approximate receipt of dividends would work out to Rs 62,599 crore (Rs 50,408 crore of equity dividends and Rs 12,191 crore of three special dividends).
There is more to the latest buyback announcement than meets the eye. In the wake of the budget proposal for taxing LTCG, Tata Sons, on March 16, disclosed that it had sold 3,12,69,000 (3.13 crore) equity shares, which translated to 1.63% of its shareholding in TCS in the open market on March 13. Given that Tata Sons's disclosure to the stock exchanges did not mention its selling price for the shares, the average share price (considering TCS's opening, high, low, and closing share prices on the BSE and NSE) works out to Rs 2,970.12. And, the transaction value for 3.61 crore shares works up to an approximate Rs 10,484.17 crore on the basis of the average share price. It is worth reiterating that the amount did not invite any LTCG as the transaction was closed in FY18, before the budget proposals got implemented as tax rules.
Now here’s the academic-cum-economic rationale for a buyback, and why it makes sense for a company and its shareholders to welcome buybacks more than equity dividends. There is a clear gain for shareholders, as TCS has proposed to buyback its shares at Rs 2,100 a share-premium of 17% to the price TCS shares commanded on June 15. But the bigger advantage of a buyback is that its reduces the number of outstanding shares of the company, boosting its per-share earnings, profits, cash flow and also the return on equity. Together, the improved metrics take the share prices upwards in future, and help to increase capital gains.
Fundamentally too, a much higher dividend, or a buyback, was a loud calling looking at TCS’s financials for FY18. In the last three fiscals, TCS’s investments in mutual funds and government securities moved up from Rs 22,653 crore in FY16, to Rs 41,839 crore in FY17, and stood at Rs 35,950 crore in FY18. Interestingly, TCS registered Rs 1,03,482 crore as proceeds from disposal/redemption of investments in its FY18 consolidated cash flows, while the fiscal’s purchase of investments stood at Rs 97,473 crore. On net basis, TCS redeemed/sold investments worth Rs 6,009 crore in a year when its first buyback of 16,000 crore took effect. It’s earnings from dividends was a petty Rs 9 crore.
Thus, a handsome dividend was a must-give. But that would have been way more taxing for Tata Sons. So, the second buyback pegged at Rs 16,000 crore (again) will make Tata Sons the biggest beneficiary of the gains being TCS’s largest shareholding. Who else but Tata Sons should cheer for the second TCS shares buyback?