The Infosys board has announced to launch a share buyback offer, buoyed by the company’s robust performance in the recent quarters.
Infosys approved the share buyback proposal at its board meeting on October 13. The Bengaluru-based global IT company is offering a maximum price of Rs 1,850 per share.
So, what is a buyback offer and how you could participate in it?
According to Section 68 of the Companies Act, 2013, buyback is a process through which the company repurchases its own shares from its shareholders using funds from free reserves, securities premium account or proceeds of sale of other share issue or specified securities.
According to Sub-Section 7 of Section 68 of the Companies Act, 2013, when a company buys back its shares, it must destroy them within seven days from the last day of the completion of the buyback process.
In a release, Infosys said it has earmarked Rs 9,300 crore, the maximum buyback size excluding tax, for the buyback from the open market.
Explaining the tax aspects, Aarti Raote, partner, Deloitte India, said the company is liable to pay a buyback tax of 20 per cent, plus surcharge and cess, (the present rate is 12 per cent surcharge and 4 per cent educational cess) on the differential between buyback price and issue price.
However, Raote added investors of such companies “are exempt from paying any tax on gains.”
Since it is an open market buyback and the price is not fixed by them, it is difficult to accurately tell how much money will be used for buyback. Hence, the Infosys board has set certain limits.
In the Infosys case, the maximum buyback amount is Rs 9,300 crore and the maximum volume of shares is 50,270,270 units. Infosys could either buy the shares at a maximum of Rs 1,850 per share or above this price.
Narendra Solanki, head, equity research, Anand Rathi Shares and Stock Brokers, said, "Under Open Offer Buyback the company purchases its shares directly from the market during the pre-defined window. Under the open market mechanism, the company can buy back its shares at current market price or the maximum Buy Back price whichever is lower (Rs 1850 in case of Infosys) during the buyback period window through exchanges."
As of 11 am October 14, Infosys stock was trading at Rs 1,489 on the Bombay Stock Exchange (BSE).
The following are possible scenarios:
If bought below Rs 1,850 per share:
“If the 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,” the Infosys board said.
If bought at Rs 1,850 per share or more:
If the Infosys shares reach Rs 1,850/ per share, the maximum buyback price, the company will use at least 50 per cent of the amount or Rs 4,650 crore earmarked for buyback to purchase a minimum of 25,135,135 shares.
“The Company shall utilise at least 50% of the amount earmarked as the maximum buyback size for the buyback i.e. Rs 4,650 crore. Based on the minimum buyback size and maximum buyback price, the company would purchase a minimum of 25,135,135 shares,” Infosys said.
If you wish to participate in the buyback process, all you have to do is to sell the shares as you would normally trade in the market.
In 2021, Infosys’ maximum buyback amount was Rs 9,200 crore and the maximum shares to be bought back was 52, 571,428 shares with a maximum buyback price of Rs 1,750.
The buyback process commenced on July 25, 2021 and in a press release dated September 8, 2021, Infosys’s Board of Directors informed that they had bought back 5,58,07,337 shares at an average price of Rs 1,648.53 and used 99.9999996 per cent of the maximum buyback size, which was Rs 9,200 crore.
“The company shall use at least 50% of the amount earmarked as the Maximum Buyback Size for the Buyback, i.e. Rs 4,600 crore (“Minimum Buyback Size”). Based on the Minimum Buyback Size and Maximum Buyback Price, the Company would purchase a minimum of 2,62,85,714 Equity Shares,” read a Infosys notice in 2021.
According to the Companies Act, 2013, a buyback can be carried in the following manner.
In a tender offer there will be proportional ratio determination and the concept of acceptance ratio is at play here, meaning suppose you tender 10 shares of the company for buy back but not all of them might be taken for buyback, it will depend on the ratio of acceptance. In an open offer there is no such thing. Also in tender offer type of buyback there is a minimum reserved portion for retail investors (someone who holds Rs 2 lac shares or lower) which is 15 per cent of the buyback offer size.
"In the tender offer type the buy back price acts as a floor price and company buys its share atleast at the buy back price defined and the acceptance is calculated based on number of shares tendered in comparison to total buy back shares," added Solanki.
