TCS' Rs 16,000 cr buyback: They can work their magic only in the short term

Tata Consultancy Services’ buyback size worth Rs 16,000 crore will be the biggest ever in the domestic market, surpassing Reliance Industries Limited’s offer size of Rs 10,440 crore made in 2012. 

Interestingly, RIL had purchased shares worth only Rs 3,360 crore, which is just a third the size of its proposed buyback. Hence, in terms of actual shares bought under buyback, NMDC’s is the biggest at Rs 7,528 crore, followed by Coal India at Rs 3,650 crore. Both buybacks by state-owned entities were in the current financial year as part of the government’s 2016-17 divestment programme. 

As a tool to reward shareholders, buybacks have gained wider currency after last year’s additional tax on dividends above a threshold. However, buybacks are not as efficient in lifting share prices over the medium and long terms. 

Take top 10 buybacks by size: Shares gained an average of 1.5 per cent a year after repurchases ended. Returns have been slightly better at eight and six per cent one year after buyback’s announcement and commencement, respectively. In case of top 20 buybacks by size, average returns one year after their announcement, commencement, and end are 7.4 per cent, 8.5 per cent, and 4.3 per cent, respectively. 

Hence, buybacks, at best, lift stocks in the short term. They fail to work their magic in the medium and long terms.