Share Buyback Rules in Focus After TCS Repurchase Announcement

In an announcement that it made last week, Tata Consultancy Services Ltd. (TCS) said that it would be buying back 2% of its shares at a premium of 17% against prevailing prices. In most other countries, such an announcement would have had no effect on the current share price of the company’s stock. However, in India, due to practices still in effect that attempt to protect small traders but are just as easily manipulated by the largest players in the market, TCS saw its share price improve by three percent. This “quota” system whereby the Securities and Exchange Board of India (Sebi) has attempted to afford protection to holders of stock with a total value of two lakh rupees. However, this is precisely the same protection that traders take advantage of when they announce buybacks, effectively becoming a means by which the majority shareholders are paid back what would have otherwise been taxed as dividend income.

In the case of TCS, the buyback announced would net the majority shareholders, Tata Sons Ltd., most of the value that would be recovered in the process, which is estimated to be 16,000 crore rupees. Holding a 72% stake in the company, this would mean that what would have normally paid out as dividend is now being funnelled back in the form of revenues from the repurchase. Perhaps more striking is the fact that in spite of reduced earnings being anticipated by changes in the marketplace and prevailing conditions for the last two years, the share price has continued to rise. In effect, anticipated earnings being realized by the growing distance between what is real and what is anticipated brings into question the manner in which stocks are valued, to begin with.