The Infosys board today approved a share buyback program of up to Rs 13,000 crore. The company has also decided to form a buyback committee. It is the first buyback offer from Infosys in its 36-year history.
Infosys Secretary AGS Manikanta earlier this week made an announcement saying, “The board of directors of Infosys Limited will consider a proposal for buyback of equity shares of the company at its meeting to be held on August 19, 2017.” Share buybacks usually improve earnings per share and return surplus cash to shareholders.
WHY IS INFOSYS GOING FOR SHARE BUYBACK?
Earlier in April, Infosys had announced that it would pay up to Rs 13,000 crore to shareholders during the current financial year through dividend and/or share buyback. In its announcement it said: “The board has identified an amount of up to Rs 13,000 crore to be paid out to shareholders during financial year 2018, in such a manner (including by way of dividend and/or share buyback), to be decided by the board, subject to applicable laws and requisite approvals, if any.”
Infosys’ buyback decision has come in the back of massive investors’ pressure who wanted the company to utilise its cash reserves of USD 6 billion either through share buyback or generous dividend. The pressure had grown further after other tech companies such as Cognizant and TCS announced their mega buyback offers worth USD 3.4 billion and Rs 16,000 crore, respectively, to return surplus cash to shareholders. HCL Technologies has also approved a buyback of up to 3.50 crore shares worth Rs 3,500 crore.
WHAT IS SHARE BUYBACK?
Share buyback means re-purchase of shares by a company to reduce the number of shares trading in the market. Market experts believe that it usually shows the confidence of promoters in the future of the company. There are a number of reasons why companies go for buybacks. Companies go for buyback in cases where they want to reward investors, increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence.
MODES OF SHARE BUYBACK
Some common buyback routes companies take are tender offer and open market purchase. In tender offer, the company makes an offer to buy a certain number of shares at a specific price directly from shareholders. Share buyback ensures all shareholders are treated equally, however small they are. In open market purchase, the company decides to acquire a certain number of shares. It fixes a price cap and can buy for any price up to that. Most companies prefer the open market route. The biggest difference between the two -tender offer and open market purchase- is that the price in the tender route is fixed.
DECLINE IN SHAREHOLDERS’ HOLDING VALUE
Infosys shareholders have seen the value of their holdings fall about 20 per cent over the past 12 months. The entire Indian IT sector is facing challenges but the fall in the IT sector has been just 11 per cent. The biggest reason for the poor investor interest – apart from the challenges that IT sector is facing – was the apparent lack of confidence shown by founder-promoters in the management.
CHALLENGES AHEAD OF INFOSYS
Infosys has been struggling to grow even in high single digits as the global IT services market sees a tectonic shift from IT outsourcing to digital, cloud, artificial intelligence and automation. Then there is the opposition to outsourcing of jobs in big markets such as the US and the UK that is forcing the players to increase spending for hiring more locals. Infosys thinks that Vishal Sikka’s goal of USD 20 billion revenue and USD 80,000 revenue per employee by 2020 will have to be postponed. Infosys has also seen a number of high-profile exits of late even as its bets on innovation and higher-value offerings are yet to pay off.
FIGHT AT INFOSYS
The turn of events at Infosys in the last two days has been dramatic with Vishal Sikka announcing his resignation and the Infosys board putting the blame squarely on Narayana Murthy for Sikka’s exit. Despite Sikka’a resignation, the fight between the management and the founders may not be over anytime soon.
The board has blamed Murthy for carrying out a campaign against Sikka. Murthy has responded to the allegations. “I am extremely anguished by the allegations, tone and tenor of the statements. I voluntarily left the board in 2014 and am not seeking any money, position for children or power. My concern primarily was the deteriorating standard of corporate governance which I have repeatedly brought to the notice of the Infosys board,” Murthy said in a statement. He further added: “Several shareholders who have read the whistle-blower report have told me that it is hard to believe a report produced by a set of lawyers hired by a set of accused, giving a clean chit to the accused, and the accused refusing to disclose why they got the clean chit!”
It all started with Infosys’ decision to pay hefty severance pay to two of its employees. That irked the many former board members, including Mohandas Pai. Infosys had paid a package of Rs. 17.38 crore to ex-CFO Rajiv Bansal’s severance. Pai said: “CFOs (in past) have left the company and they have not got any separation. There is no case for a special treatment for anybody. And the management cannot be generous with shareholder money because it’s not their money. It’s a serious lapse which should be looked into by the board.”
The founders were also angry over massive pay hike to top Infosys officials, including CEO and MD Sikka. Infosys founders N R Narayana Murthy, Kris Gopalakrishnan and Nandan Nilekani had written to the board expressing their concerns over pay hike to Sikka. Mohandas Pai had said a CEO’s pay should be linked to his performance, achievement of the annual plan and increase in shareholder value.
It was reported that Sikka drew an annual pay package – during 2015-16 – of a whopping Rs 49 crore which was much higher than his counterparts in other Indian IT companies. While the then TCS chief N. Chandrasekaran was paid a pay packet of Rs 25.6 crore by the Tata Group for 2015-16, Wipro CEO Abidali Neemuchwala’s annual pay was Rs 12 crore.