April 27, 2017    5 minute read

Introducing The Great Indian Share Buyback Extravaganza

Satisfying (Some) Investors    April 27, 2017    5 minute read

Introducing The Great Indian Share Buyback Extravaganza

The Indian stock market these days are filled with news of market leaders going for hefty buybacks and smaller companies following the footsteps of these big names. Recently, we saw TCS going for a Rs 16000 crore buyback at the price of Rs 2850/share which was at an 11% premium over the current markets prices at the date of the announcement. Why is there so much buzz around buyback of shares? What motivates Companies to go for huge buybacks at such high premiums?

Firstly, a share buyback is the repurchasing of shares from the market by the firm in order to award shareholders (substitute of dividend) or when the company thinks that the current prices are undervalued. Over the past year, there have been around Rs 45000-50000 crores buyback in the Indian Stock Markets which is substantially higher than previous years. What has happened which has motivated Indian corporate houses to go for such large buybacks?

Taxes

As per SEBI, Dividend Income is tax-free in the hands of the investors and corporates have to pay Dividend Distribution Tax(DDT) on behalf of the investors at a rate of 17.304%, same as with Tax Deducted at Source(TDS). But, in the previous Union Budget 2016, the government introduced an additional 10% over and above the Dividend Distribution Tax (DDT) if an individual, foreign institutional investors, high net worth or any other stock market participant has a Dividend Income of more than Rs 10 Lakhs. 

The Indian stock markets have an average Dividend Yield (Dividend Per Share/Current Market Price) of 1.57% for the last ten years. Hence, for anyone having a dividend income of more than Rs 10 lakhs, he or she should maintain a portfolio of around Rs 10 crores which is not possible for most retail investors. Thus, the Government’s aim was to increase its tax revenues by taxing the rich.

The worst hit by this amendment were the company promoters. Those who should have huge dividend income by having a majority stake. As a result of the announcement, around 250 companies called their board meetings to declare interim dividend while around 100 companies paid the interim dividend in the Month of March itself amounting to Rs 20000 crores. Most of these were private companies where the promoter had a majority of shareholding.

With dividend now having such a high cost, the companies had to think of another way to keep their shareholders satisfied. This is where buyback enters the picture – the tax liability of share buyback is borne by the shareholder and not by the Company in case of a capital gain.

Since April 2016, around 100 companies have executed a buyback amounting to Rs 1 Lakh Crores in the Indian Stock Markets. The companies are claiming that the buyback is because of the high cash flows and reserves they have accumulated on its balance sheet. But, the ground level reality is that the companies have successfully avoided huge tax liabilities for their promoters and other large shareholders. The retail investors, on the other hand, are happy with the capital gains arising out of buyback but are unaware of the fact that these companies have successfully transferred the burden of tax from them to the poorer retail investor.

Tax liability of shares buyback

Particulars

Liable to Whom

Treatment of Tax

Short Term Capital Gains

Shareholder

Slab Rate Applicable

Long Term Capital Gains

Shareholder

U/s 46A of IT Act

Major buybacks in the last year

Company

Amount

Buyback Price

Current Market Price on the date of announcement

TCS

Rs 16000 Crores

Rs 2850

Rs 2500

Sun Pharma

Rs 675 Crores

Rs 900

Rs 780

Dr Reddy’s Labs

Rs 1570 Crores

Rs 3500

Rs 3310

Bharti Infratel

Rs 2000 Crores

Rs 425

Rs 380

Wipro

Rs 2500 Crores

Rs 625

Rs 580

The HCL Technologies board will meet up for considering a buyback following the footsteps of Infosys.

In Conclusion

These companies say they conducted such large buybacks because they accumulated tremendous cash surpluses and in order to keep their shareholders happy wish to buyback “at a hefty premium.” But the reality is, these companies have successfully avoided the huge tax burden which their respective promoters would have had to pay if they had gone for a dividend instead of a buyback.

The government’s intention was to tax the rich with this amendment, but it seems eventually whatever amendments are introduced; the final burden is always borne by the common man. The Government has clearly failed to check for loopholes surrounding amendments.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details

or    

Forgot your details?

Create Account

Send this to a friend