In a bid to beat the October 1 deadline when the new tax regime came into effect, India Inc has executed buybacks worth ₹5,778 crore in just over two months.
Of the 31 buyback offers worth ₹7,097 crore announced this fiscal, 25 offers worth ₹5,778 crore were executed after the Budget announcement.
In the Budget, Finance Minister Nirmala Sitharaman shifted the tax liability on share buybacks from companies to shareholders.
As per the earlier rules, companies undertaking share buybacks were subject to a 20 per cent tax and amount received by investors from the company for tendering shares was tax-free in the hands of shareholders.
Few corporates have latched on to share buyback over dividend for rewarding investor since April 2020 when tax on dividend was shifted from corporates to shareholders.
In FY24, there were 42 share buybacks worth ₹50,126 crore.
Liberal offers
Being the last buyback under the old tax regime, corporates were more liberal in setting the buyback price.
Cera Sanitaryware has offered to buyback shares at a premium of 19 per cent at ₹12,000 a piece against record day price of ₹10,108. Symphony offered a premium of 52 per cent at ₹2,500 per share against the record day price of ₹1,647 while Indian Toners & Developers offered a premium of 32 per cent at ₹450 a share against record day price of ₹341.
Windfall for Govt
The tax treatment on share buybacks will now be on par with that of dividends. 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.
Ankur Punj, Managing Director, Equirus Wealth, said companies have rushed to beat the October deadline, engaging in a race to complete their buybacks before the new rules took effect.
Companies aiming to increase ownership may still opt for the buyback route even while shareholders may find it less attractive, he said.
To offset the higher cost on shareholders due to the new tax regime, companies may have to increase buyback prices substantially, he added.
Anirudh Garg, Partner and Fund Manager, Invasset PMS, said corporates may reconsider their capital allocation strategies, potentially reducing the frequency of buybacks in favour of other avenues such as reinvestment in the business or paying dividends.
Returns from buybacks for high-net-worth individuals and institutional investors will diminish, making dividends or other capital distribution methods equally appealing, he said.