TCS Buyback: A 20% return trade?
Did the buyback announced by TCS just open up a short term trading opportunity?
TCS (Tata Consultancy Services) is back yet again with a share buyback. The company intends to buyback shares worth INR 18,000 Cr at INR 4500 per share (current market price being INR 3730). I sense a window of opportunity that this buyback has opened for the Retail Investors. And this post is dedicated to that! (Read Disclaimer at end of post)
Share Buyback simply means the company want to reward its shareholders (and raise its stake in the company). It intends to use the cash lying with it to pay the share holders who in turn will handover their shares to the company. Straightforward right? And it is done proportionately, so the company buys back greater number of shares from an investor who holds more shares than other investors.
The more interesting things begins from here. While the company is buying back ~1% shares from existing shareholders proportionately, there is a ‘reserved category’ for retail investors which is 15% of the buyback size. Putting numbers to this, the reserved category for TCS buyback constitutes 60 Lakh shares which can be tendered (handed back to company) only by small investors. Also, definition of retail investor as laid down by Indian Stock Exchanges & Regulator are individual investors who own TCS stock (or for that matter any other stock) worth no more than INR 2 Lakh. At the current market price, to be considered a retail investor you should be holding no more than 53 shares of TCS.
Unfortunately for me, I did not get the data for investors holding 1-50 shares (data in table above) which would have given me a very good accuracy of the jugglery that I am about to do. Although you can question me, I am just going to assume 50% of those holding 1-100 shares are investors holding 1-50 shares.
Simply put, if less than 71.7% of shares are tendered by the eligible retail investor then all the shares will be accepted for the buyback. Anything more leads to reduction in acceptance ratio as shown in the table above.
To a large extent this was a theoretical exercise and you can hold me to it saying my assumption is misplaced and there are more number of holding shares then what I have accounted for. If history is any guide then following are the acceptance ratios for the buybacks that TCS has done in the past.
Clearly shares tendered in previous buybacks were far lesser than the buyback shares reserved for retail investors. For the last 2 buybacks, retail participation was only 45% & 35% of the reserved portion.
Now, you may begin to start seeing why this opportunity is tempting. There is one more reason why it might be attractive to participate in buyback. Unlike dividend income which is taxed at the hands of investors, buybacks are not. Neither the Short Term or Long Term Capital gain tax (STT still needs to be paid though) are needed to be paid on buybacks. Thus, if I was been holding TCS from a lower level I would be happily tendering my shares to book out the profits.
However much I would like, this is not a 100% guaranteed & risk free idea (nothing in financial markets ever is). But probability is skewed significantly in favor of reward. Assuming you bought TCS at INR 3730 and the acceptance ratio is 50%, the stock has to tank more than 20.64% to become a loss making trade.
The record date for the buyback has been announced as 23rd February, 2022. So if you feel any merit in this trade you need to own TCS shares no later than this day. The notice can be read here.
Hope you found this article interesting. If you missed reading the previous issue of Dalal Street Rafting on Vedant Fashion IPO check it out here.
Disclaimer: Views presented in this article is personal opinion of author and doesn’t not represent any firm’s view that he is currently associated or might have been associated in the past. No part of it should not be considered as a recommendation to buy or sell any stocks etc. This is an educational article and although care has been taken for correctness of the data, author does not take any responsibility for any errors or omissions.