Buyback of equity shares hits six-year high in FY17

41 companies take back shares worth Rs 27,783 crore in FY17

Buyback of shares has hit a six-year high in 2016-17 (FY17), with 41 companies announcing offers in the last 11 months totalling Rs 27,783 crore (Rs 277.83 billion), as against 16 firms during the entire previous financial year (FY16).

Of the 41 companies, 10 still have their offers open amounting to Rs 1,575 crore (excluding the proposed offer by Tata Consultancy Services or TCS).

Most of these companies announced buyback through the tender route, which offers a fixed price to shareholders for a certain number of shares. A buyback reduces a company's cash and number of shares. As a result, the EPS (earnings or net profit per share) goes up.

Also, buyback may lift share price in the short term.

"In most companies, capital expenditure has been put on hold. As a result, there is idle or surplus cash, which is dragging down the return ratios. There is pressure from shareholders, too, as the stocks haven't performed well. Hence, it is better to return the cash to them.

Secondly, after changes to Dividend Distribution Tax, buyback offers a more lucrative way to return the money to shareholders than dividends.

Thirdly, the promoters could want to give temporary support to the share price by initiating a buyback. All these reasons have seen all these companies opting for this route in FY17," explains Deepak Jasani, head of retail research at HDFC Securities.

On Monday, TCS board approved a proposal to buy back up to 56.14 million shares of the company for an amount not exceeding Rs 16,000 crore (accounting for 2.85 per cent of the money received for selling shares through Initial Public Offering of stocks), at Rs 2,850 per share. The TCS stock rallied four per cent to close at Rs 2,506 on BSE (formerly Bombay Stock Exchange).

"For those who own TCS shares, it would be sensible to tender the shares in the buyback offer. In the run-up to the buyback, one can even exit fully or partially. For information technology (IT) stocks to rise sustainably, they need a trigger in terms of order flows, profit outlook, and others. All this is missing right now," Jasani of HDFC Securities says.

A buyback proposal signals company belief that its shares are undervalued, analysts say.

"Given the offer from TCS has come at a time when the IT industry is facing challenging times, it is better shareholders make use of the offer, or exit via the market route in case the stock moves up from here on," says G Chokkalingam, managing director of Equinomics Research & Advisory.

Photograph: Mukesh Gupta/Reuters