As many as 17 buyback offers from various companies, including Mphasis, Cochin Shipyard, Adi Rasayan, Natco Pharma, LMW, ICRA, TD Power Systems, Radio City and McLeod Russel are currently on. While some of them are through open market purchase, others prefer to buy back their shares through open market operation.
Earlier this year, big firms such as TCS, Infosys, HCL Technologies and L&T had completed buyback offers through the tender route.
Of late, the number of companies, including government-owned PSUs, seem to prefer buyback of shares instead of paying out dividends to reward their investors.
So, why are companies preferring the buyback route?
One of the major reasons was the Union Budget 2016, which made dividend receipts above ₹10 lakh taxable at 10 per cent in the hands of investors. When a company declares a dividend, there is already a dividend distribution tax (DDT) on the payout. Besides, the dividend is paid out from the net profit, which in itself is arrived at after paying corporate taxes. So, Budget 2016 imposed additionally a tax on dividends (above ₹10 lakh) for high net worth investors and, therefore, made dividend payments unattractive. But when a buyback is conducted through the tender offer route on proportionate basis, the profit is treated as long-term capital gains. Even at a long-term capital gains tax of 10 per cent, this works out more economical than taxes on dividend payouts.
Improves EPS, valuation
There are other benefits too in going the buyback way over making dividend payments. Dividend is distributed by companies from the net profit in the form of cash payouts, and to that extent it reduces the addition to the net worth of the company and thus, its market value. However, as buyback is a reduction of the outstanding capital, it improves the earnings per share (EPS) of the company and thus, valuation.
Besides, buybacks also act as price stabilisers. When a company indicates that it is willing to buy back the stock at a certain price, it generally gives a signal to the market of a fair price for the stock. However, this need not contain declines as there are instances too, of stock prices falling below the buyback price.
In case of dividends, no such signal emanates from the announcement, although dividend yield does act as a support for the stock price. Besides, buybacks also help promoters consolidate their stake in the company, if they don’t tender their shares.