A sharp squeeze in equity trading volumes will be one of the key consequences of a 20 per cent tax proposed to be imposed on buyback of listed company shares. Also, such a tax would make SEBI’s 2015 share buyback norms redundant, experts told BusinessLine .

Buyback of shares was one of the key methods used by companies to pass off surplus tax in their accounts to shareholders. Buyback offers worth ₹50,000 crore were announced in financial year 2018 alone.

A counter where share buyback was either expected or announced saw a jump in trading volumes for several weeks, thereby generating crucial share market liquidity worth thousands of crores and giving a windfall on securities transaction tax (STT) to the government.

In addition to the STT generated through trading volumes, the companies that announced buyback also deducted STT when they bought the stock under buyback from shareholders. All these activities generated fees for the exchange and also SEBI.

“Companies indulging in share buyback on stock exchange platform will face a double in whammy of STT, other levies in addition to 20 per cent tax. To cut the trouble they will simple do buyback off the platform. But even as the government gains its 20 per cent tax, trading volumes will be sucked out of the markets and even exchanges and SEBI will lose their fees,” said a senior SEBI official on condition of anonymity.

The official further added that if fewer companies went for buyback it would mean loss of crucial STT revenue for the government.

Share buyback was like a ‘gold rush’ mania on Dalal Street in 2018. In financial year 2018 alone, 41 companies completed their share repurchase offers worth ₹49,067 crore, the highest ever. Of this, seven IT services companies accounted for ₹44,984 crore or 92 per cent. This includes the ₹16,000-crore buyback by TCS and ₹13,000 crore by Infosys. The trading volumes that these companies generated in the markets prior to and after several weeks of buyback ran into lakhs of crore.

Share buyback was put on the exchange platform by SEBI post 2015 with a view to push up trading volumes. The regulator made amendments to it rules to make it effective that long term capital gains tax was to be exempted if STT was paid on share buyback.

Companies used buyback was an alternative when dividend distribution tax (DDT) at the rate of 15 per cent was announced. Brokers say DDT was double taxing of same income of companies as they had to pay this tax even when income tax was earlier paid on the same surplus cash or earnings.

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