Why is Infosys' buyback taking time?

Nomura believes an open market purchase would be a better option than a tender offer for Infosys

Given the performance of stocks over the past few months and the mounting cash pile in their books, most information technology companies - Infosys, TCS, Wipro and HCL Technologies - have announced a buyback to reward shareholders over the past few months.

The buyback in most cases was through the tender route, under which repurchases were executed using a fixed price tender offer. TCS board, for instance, approved and completed its proposal to buy back up to 56.14 million equity shares of the company for an aggregate amount not exceeding Rs 16,000 crore at Rs 2,850 per equity share. Besides TCS, HCL Technologies, too, has completed the buyback process.

On a year-to-date basis, Infosys has lost over 3% at the bourses as compared with around 20% rally in the Nifty50 index, ACE Equity data show.

Surprisingly, Infosys that announced a buyback ahead of its peer TCS, is yet to set the ball rolling. Despite more than three months since the company first indicated its intention, the contours and approval of the buyback have not been received, reports suggest.

In a recent report, Ashwin Mehta and Rishit Parikh of Nomura list reasons that could have led to the delay. As of now, none of the regulators - SEBI (India), SEC (US) or Euronext - has approved the buyback, they say.

That said, Nomura believes in case of Infosys, an open market purchase would be a better option than a tender offer.

"TCS / Wipro / HCL Technology did that because promoters also wanted to participate and held between 60% and 73% stake. For Infosys, promoters own just a total 12.75% stake, and for them selling their proportionate stake of around $250 million - $255 million would be more easily doable. Plus, a market purchase can be timed to make opportunistic purchases and is likely to be more EPS accretive," Mehta and Parikh say.

Nomura lists three major reasons for the delay:

Multiple regulators: Given that Infosys is listed in four countries - India, US (NYSE), UK (Euronext) and France (Euronext) - it has to deal with four different regulators, which is a cumbersome process. On the other hand, Nomura feels, peers like TCS and HCL Technologies are listed only in India. Wipro, on the other hand, has an American Depository Reciept (ADR) holding of around 2% versus 17% for Infosys.

"Wipro falls into a different category given the smaller shareholding, and that has possibly helped it get an exception from SEC on tendering, according to Infosys management," the Nomura report says.

FII holding: Complexity also increases as FII shareholding in Infosys is around 40%, which puts it in different category vs competitors such as Wipro, where this is in the single digits. This higher FII holding, the Nomura report says, leads to more approvals and more scrutiny from regulators in those regions, so that those investors are fairly treated.

"There might be some hesitation, and in some cases a regulator might want the other regulator to make a decision first, and the second regulator would then follow suit. So this also would take time," the Nomura report says.

Procedural differences: Another reason for the delay, the report says, are the procedural differences. For instance, there are still questions on whether ADR holders can tender them as such or whether they would have to convert these ADRs to stock and then tender. So, exceptions and answers to some of these questions are being sought from regulators. Moreover, in India the buyback tendering period is 10 days, while in the US it is 20 days.