Notwithstanding the favourable south-west monsoon, Corporate India has been flooding the market with buyback offers before the unfavourable tax changes announced in the recent Budget take effect from October 1.

In the Budget, Finance Minister Nirmala Sitharaman shifted the income tax liability on share buybacks from companies to shareholders.

The Board of 13 companies have met after the Budget announcement and proposed to buy back shares worth ₹4,572 crore.

Indus Tower leads the pack with an offer of ₹2,640 crore followed by AIA Engineering and Savita Oil Tech which will buyback shares worth ₹500 crore and ₹364 crore, respectively.

Cera Sanitaryware has offered to buyback shares at a premium of 19 per cent at ₹12,000 a piece against Friday’s close of ₹10,108.

Windfall for Govt

Per the existing rules, companies undertaking share buybacks are subject to a 20 per cent tax and it will be tax-free in the hands of shareholders.

However, come October, the entire amount received by shareholders from buybacks will be treated as dividend income and taxed according to their respective income tax slabs. The responsibility for withholding tax lies with the company.

The move will be a windfall for the Government as the tax collection can go up to 39 per cent. Experts believe that the new buyback tax is disproportionately higher than long-term capital gains tax of 12.5 per cent and short-term capital gains tax of 20 per cent, which apply when shares are sold to other buyers.

Manish Chowdhury, Head of Research, StoxBox, said more cash-rich and low leveraged companies with predictable cash flows in future are expected to join the share repurchase bandwagon.

He added that IT sector companies, given their strong balance sheets and relatively subdued stock price movements, are prime candidates to take advantage of the changing taxation scenario and are likely to be at the forefront of share buybacks.

Satish Menon, Executive Director, Geojit Financial Services, said the new rules will reduce non-retail investors participation in buybacks as the response will depend on their individual tax slabs. However, he said investors may respond positively for ongoing offers as it comes at a premium due to the bullish market sentiments.

Narinder Wadhwa, Managing Director & CEO, SKI Capital Services, said the markets may see a wave of buyback activity in sectors such as IT, pharma, FMCG, financials and energy utilities with strong cash positions and stable earnings. It is essential for investors to evaluate each buyback on its merits, considering the company’s financial health and the potential long-term benefits of the buyback, he added.

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