Cashback Season at India Inc
Sixteen companies have either announced or completed buyback. Shareholders would receive over Rs 20,525 crore in cashback at negligible tax rate.
In just three months into the new financial year, sixteen companies have either announced or completed buybacks. These companies have returned Rs 24,175 crore in cash to shareholders in exchange for their shares, according to data compiled by BloombergQuint.
In each of the sixteen companies, the promoter held more than 50 percent stake and participated in the buyback, on a proportionate basis, under the tender offer route on the stock exchange.
Buyback vs Dividend
Typically, companies use buybacks to return surplus cash to shareholders and thereby improve return ratios. Buybacks can also help in boosting stock prices. Two recent developments have made buybacks popular among Indian companies.
Last year SEBI amended regulations to allow companies to buy back shares through the stock exchange. These regulations came into effect starting July 1, 2015. While transacting in shares on the stock exchange attracts a Securities Transaction Tax (STT), the total tax burden can be lower than in off-exchange transactions. That’s because on-exchange transactions are exempt from long term capital gains tax if the shares have been held for more than a year, whereas off-exchange transactions are not. In the case of short term capital gains, the shareholder will be taxed at a flat rate of 15 percent irrespective of whether the transaction is routed through the stock exchange. By the way, in the case of a buyback the shareholder pays the tax, if any.
Dividends are a more traditional cash payout option to shareholders. But in India, companies have to pay dividend distribution tax (DDT) at 20.3 percent on the total dividend amount before distributing it to shareholders. The dividend distribution tax was hiked to 20.3 percent from 16.9 percent in this year’s union budget.
Both changes – moving buybacks on-exchange and increase in the dividend distribution tax – have worked in favour of buybacks.
For the purpose of illustration, consider that a company decided to pay dividend of Rs 1,000. On this the company will have to first pay DDT at rate of 20.3 percent and then distribute the balance amount to its shareholders. On the other hand, if the company chooses to buy back its shares it saves on dividend tax. Here, the promoters who are the long term holders of shares get considerably more tax-free income.
Tax experts say that’s why there’s been a sudden increase in buyback offers. “Buyback through the tender offer route is definitely beneficial for the company and the shareholders,” says Ameet Patel, partner of Manohar Chowdhry & Associates.
Meanwhile on July 11, 2016 Coal India Limited decided to buy back up to Rs 3,650 crore. Earlier five subsidiaries of Coal India Limited had concluded buyback worth Rs 5,095 crore. The buyback rage is catching on.
