Cons outweigh pros in share buybacks

Cons outweigh pros in share buybacks

All buybacks do not signal self-confidence
Wipro has joined 26 other companies, including some tech peers, in announcing a hefty share buyback. A share buyback might bump up the share price in the short term but could well serve to erode investor confidence, depending on the context. When Apple bought back some of its own shares, it merely returned money it had no immediate use for to shareholders in a tax-efficient manner -in the US, dividends suffer higher tax as compared to capital gains. That is welcome. There are no worries about Apple's business model or its investments in itself to retain its innovative edge. That is not the case with India's tech industry today.
Indian tech industry's traditional model of increasing revenue in proportion to the number of employees on the rolls is coming unstuck. Automation and artificial intelligence threaten to eat the tech industry's lunch. At the same time, nationalist populism forces localisation of the workforce -onshore employees have to be, for the most part, local recruits, eroding margins. The only way the tech industry can rise to the challenge is to invest in itself. The share of the work that is done onshore must be minimised, raising the share done back home in India. This calls for greater domain expertise, greater automation of the work and the ability to present the client with innovative solutions. All this calls for greater investment internally , to hire superior talent, to upgrade existing talent, to develop product and process solutions to make the company's own internal working more efficient, and to buy companies that house domain consulting expertise not available in-house. If Indian tech companies make adequate investment in all these things and still have large sums to spare, no one would crib about share buybacks. But that such self-renewal is afoot is not self-evident.
In which case, worries come to the surface: the short term spike in share prices is good for management compensation pegged to the price of or in the form of shares, the management seems intent more on buying investors' short-term quiescence than on long-term profitability -a consummation best avoided.