Infosys' buyback of Rs 8,260 crore to be held at 17% premium; what does this mean to shareholders, investors - Find out

Infosys will buy back its own fully paid-up equity shares of 103,250,000 unit aggregating up to Rs 8,260 crore comprising approximately 2.36% of the paid-up capital of the Company as of December 31, 2018 (on a standalone basis).

The details of the buyback have been informed by Infosys, however, no dates to when it will take place is revealed. Photo: Reuters

Once again Infosys has announced a new buyback, however, slightly lower in comparison to its previous share repurchase worth Rs 13,000 crore which took place in 2017. Infosys board of directors have approved a buyback of Rs 8,260 crore which will be held at a price not exceeding Rs 800 share price. Thereby, Infosys new buyback will take place at a premium of 17%, if we look at today's market price of Rs 683.70. The details of the buyback have been informed by Infosys, however, no dates to when it will take place is revealed. Let's understand what does this buyback means to Infosys shareholders and investors.

The Buyback!

Infosys will buy back its own fully paid-up equity shares of 103,250,000 unit aggregating up to Rs 8,260 crore comprising approximately 2.36% of the paid-up capital of the Company
as of December 31, 2018 (on a standalone basis).

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The buyback will take place at a price of Rs 800 per equity shares through the open market route through the Indian stock exchanges, in accordance with the provisions of the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 (as amended) ("Buyback Regulations”) and the Companies Act, 2013 and the rules made thereunder (“Buyback”).

Also, ADS holders are permitted to convert their ADS into Equity Shares, and, subsequently, opt to sell such Equity Shares on the Indian stock exchanges during the Buyback period.

Maximum buyback size of Infosys does not include any expenses or transaction costs incurred or to be incurred for the Buyback, such as, brokerage, filing fees, advisory fees, intermediaries’ fees, public announcement publication expenses, printing and dispatch expenses, applicable taxes such as securities transaction tax, goods and services tax, stamp duty, etc., and other incidental and related expenses.

If the Equity Shares are bought back at a price below the Maximum Buyback Price, the actual number of Equity Shares bought back could exceed the Maximum Buyback Shares, but will always be subject to the Maximum Buyback Size.

Infosys will utilise at least 50% of the amount earmarked as the Maximum Buyback Size for the Buyback, i.e. Rs 4,130 crore. Based on the Minimum Buyback Size and Maximum Buyback Price, the Company would purchase a minimum of 51,625,000 Equity Shares.

People who can participate in this buyback are - equity shareholders of the Company (other than the Promoters, the Promoter Group and persons in control of the Company), being 14.54% of its paid-up share capital and free reserves as on December 31, 2018.

This means even promoters of Infosys will participate, hence, the decline in their shareholding can be expected.

As on January 09, 2019, Infosys promoters and promoter group cumulatively hold 560,182,338 equity shares in Infosys resulting in 12.82% of stake.

There are 22 shareholders of Infosys currently, with Sudha Gopalakrishnan, Rohan Murthy, S.Gopalakrishnan, Nandan Nilekani, Akshata Murthy, Sudha N. Murthy, Rohini Nilekani, Dinesh Krishnaswamy, and Shreyas Shibulal being the top 10 largest holders.

Coming to retail investors, buyback prices have been decided at a premium – which provides an opportunity to retail investors to exit the stock of a particular company with an intention to book some profits.

Earlier a Value Research report on buyback revealed that, if the premium price of a buyback is intended to signal a belief that the stock is undervalued and one assumes that the management will continue to work towards improving shareholder value, then they are suggested to remain invested especially in case of a long-term investor.

The report added, “Tendering to a buyback makes more sense if you feel the share price in the market is overvalued, or you don't believe there are opportunities to grow earnings at the same pace going forward.”

By end of the day, it is all about the fundamentals and intentions of the company announcing the buyback. An investor needs to understand the underlying reason before deciding on a course of action whenever a buyback is made.

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Why does a company do a buyback?

One of the common objectives of adapting this portal is to control the drop in the value of a company's stock price – by reducing the supply of stock. This in return drives price-over-equity (PE) ratio and also improves the earnings per share (EPS) of a company.

Pranav Haldea, Managing Director of PRIME Database once said that there are a few reasons for it; firstly, share buyback has become a more lucrative way to return money to shareholders than the dividend.

Another reason is that the amount of ideal cash a company holds in their balance sheet, as these affect ratios like Return on Equity (RoE), Return on Asset (RoA), etc.

As on December 2018, Infosys' cash and cash equivalents stood at Rs 16,448 crore compared to Rs 19,818 crore in March 2018.

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