TCS buyback offer is attractive for retail investors

At Rs 2,850 a share, buyback is 13.7% above Monday's close; scrip may not see such a price too soon

The fortunes of information technology stocks haven't been all that good for some time. Some have taken a serious hit and performed way below the benchmark index -- the Bombay Stock Exchange Sensitive Index or Sensex.

For example: The Sensex's one-year returns stands at 20.9 per cent whereas among the top information technology stocks, only TCS and Tech Mahindra have delivered positive returns of eight per cent and 15 per cent in the past year. Infosys, HCL Technologies and Wipro are all down. Even over a three-year period, the Sensex has returned 39.6 per cent. In comparison, only TCS and HCL Technologies have given positive double-digit returns during this time period, at 14.3 per cent each.

Against this backdrop, the decision of Tata Consultancy Services' board of directors to go for a Rs 16,000-crore buyback augurs well for the retail investor. The buyback, which will be carried out at the price of Rs 2,850 per equity share -- a 13.7 per cent premium to the closing price on Monday -- means there is a good amount that the investor stands to earn.

Market experts obviously are of the view that it is a good opportunity for retail investors because the scrip may not see such a price soon. "Investors should take the opportunity to sell their shares because the premium is quite good. Later, they can always buy back the shares from the open market," says Deven Choksey, managing director, KR Choksey Investment Managers.

Adds Umesh Mehta, head of research, Samco Securities: "Basically the buyback offer has created an arbitrage opportunity which all investors should avail of." He says that the tender route is much more shareholder friendly than the market route.

According to Rajesh Cheruvu, head of equities, Sanctum Wealth Management, individual investors comprise 3.8 per cent of overall shareholders. Investors who hold 70 or less shares qualify as retail. Fifteeen per cent of Rs 16,000 crore, which amounts to Rs 2,400 crore, has to be set aside for them, as per Sebi norms.

"My sense is that around 15 per cent of individual investors, or 0.5 per cent of overall shareholders, would be retail investors. Their market cap at current prices is Rs 2,460 crore, whereas the amount that is being set aside for them is Rs 2,400 crore. Effectively, 85-100 per cent of their existing holdings could be accepted on submission.

According to Arun Kejriwal, founder, Kris Research, investors who own shares of more than Rs 2 lakh (and do not qualify in the retail category) need to analyse whether to tender them or sell in the open market. "Usually, after a buyback offer is announced, shares of the company rise as the offer date approaches. Investors can also benefit from selling in the open market," he says.

Investors will have to tender their shares to their brokers to participate in the buyback. TCS will buy the shares from the brokers and money will be credited into brokers' accounts. "The tax treatment will be the same as for any open-market transaction. If you have held the shares for more than a year, the capital gain tax will be zero, and if you have held the shares for less than a year, the gains will be taxed at 15 per cent," said an industry expert.