Infosys share buyback plan: Here's why Infy is mulling buyback, what it means for investors

Infosys, country's second-largest software exporter, could announce a share buyback at a premium of up to 17 percent (based on today's closing price of 1021) when its board meets in Bengaluru on Saturday. The buyback price of Rs 1,200 cited by The Financial Express in a report will lead to the utilisation by Infosys of idle cash reserves amounting to USD 6 billion.

The Infosys stock  on Thursday hit a four-month high on share buyback plan but has moved barely 1 percent or 10 points (based on today's closing price) on an year-to-date basis. On an yearly basis, the stock has been an underperformer falling 3.86 percent  or 41 points, disappointing investors on several fronts.

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." He, however, did not reveal details of the proposed share buyback. 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
What seems to be worrying the market more is the differences between Infosys management and the promoters. All is not well at Infosys as in its recent annual general meeting, none of the original promoters were present. Though the promoters had stepped down from management/executive roles about three years back, some of them used to make an appearance at AGMs to show faith in the company they had built. The confrontation - between Infosys management and the promoters - came to light in February after former Chairman Emeritus and co-founder NR Narayana Murthy alleged corporate governance lapses at the company.

Two anonymous complaints to the Securities and Exchange Board of India had also alleged impropriety in a couple of large acquisitions by the company. The anonymous complaints alleged falling governance standard  and inappropriate payments to a former chief financial officer. Infosys appointed law firm Cyril Amarchand Mangaldas to investigate the allegations, it gave the company a clean chit. However, promoters were still not satisfied. Later, the Infosys board asked another law firm Gibbs, Dunn and Crutcher LLP to investigate the case. Two days before the AGM, it also gave a clean chit to the company. NR Murthy asked the company to make the report public. But, Infosys management refused to do so.