Companies race against taxing times to give buyback call
Mumbai, Aug 13, 2024
Synopsis
Within just the three weeks since the budget announcement on July 23, 15 companies have already announced buybacks, compared with 18 that did so between January 1 and July 23.
Companies are moving swiftly to buy back shares before new tax rules proposed in the budget take effect on October 1. This will tax the buyback amount in the hands of shareholders as per their tax slabs. Currently, such transactions are taxed at about 23% at the company level.
Within just the three weeks since the budget announcement on July 23, 15 companies have already announced buybacks, compared with 18 that did so between January 1 and July 23.
Indus Towers announced a share buyback worth ₹2,640 crore on July 30. AIA Engineering followed with a buyback worth ₹500 crore on August 7. In addition, companies such as Welspun Living, TTK Prestige, Cera Sanitaryware, VLS Finance, Navneet Education and Dhanuka Agritech have announced share buybacks in the past three weeks.
Market experts anticipate that many more companies will announce buybacks in the coming month, saying that they will drop significantly starting October 1.
"There may be some spurt in share buybacks until the end of September due to their tax efficiency compared to dividends, which will end on September 30," said Satyen Shah, president and head of Nuvama Investment Banking. "From October, buybacks will still happen but more driven by the company being undervalued and managements using excess cash to buy back the shares and in turn enhance their earnings return ratios as shares bought back would be extinguished."
Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas, said that buybacks won't offer a tax advantage from October.
"Currently, share buybacks are more tax-efficient for corporates compared to dividend payouts and as a result, many companies are looking to take advantage of this opportunity before the tax benefit ends on October 1," he added.
According to the changes made in the budget, starting October 1, tax on share buybacks will be paid by the shareholder who gets the money, as per the tax slab. Here, the tax is on the entire buyback money while the cost of acquiring the shares will be recorded as a capital loss, which can be used to offset future gains from selling other shares.
Other announcements
Other companies that have announced buyback since July 23 include Symphony, Chaman Lal Setia, Mayur Uniquoters, Savita Oil Tech, Ladderup Finance and Arex Industries. The board of Technocraft Industries will meet on Tuesday to consider a proposal for the buyback of shares.
"In the past, changes in dividends taxation did result in changes to payout ratios and I expect something similar to happen with buybacks," said Jayesh H, cofounder of Juris Corp Advocates and Solicitors. "It's not that buybacks will stop post October 1. It's that where buybacks were largely motivated by transferring cash to the large shareholders at the cost of the company (bearing the tax), those will reduce dramatically."
When the tax on dividends got shifted to the company in 2003, there was an increase in payouts, including as a percentage of profits available for dividends. This was happening as the biggest shareholders no longer had to pay tax themselves. When the taxation got shifted back to the recipient in April 2020, dividend payout ratios declined.
According to Jayesh of Juris Corp, some foreign promoters might continue with share buybacks because double taxation avoidance agreements (DTAAs) could allow them to benefit from a lower tax rate. "This means Indian shareholders, who don't have the same tax advantages, will bear the brunt of the increased tax burden," he said.
While listed companies are required to have a stated dividend policy, there is no such requirement on buybacks.
[The Economic Times]
