Dividends out, Buybacks in

Parvatha Vardhini C | Updated on January 15, 2018

Palto/shutterstock.com   -  Palto/shutterstock.com

Buybacks have gained steam in the last 1-2 years, not without reason. Certain tweaks in tax laws in the last two years have made buybacks more attractive.

Until two years ago, surrendering of shares of a listed company under the tender offer route was considered an off-market transaction and, hence, not subject to Securities Transaction Tax (STT).

This implied that any shareholder who tendered his shares in a buyback offer had to pay short-term as well as long-term capital gains tax.

This compared unfavourably with the existing capital gains tax rules if shares were sold in the market. Considering this, SEBI amended the buyback regulations in April 2015.

Due to this, buyback through tender offer announced after July 2015 could take place through the stock exchanges; which means that STT would be paid on such transaction. As a result of this, long-term capital gains became tax-free and short-term gains became subject to a tax of 15 per cent (excluding surcharge and cess).

Secondly, Budget 2016 imposed a 10 per cent tax (excluding surcharge and cess) on dividends in the hands of large shareholders, ( i.e, those who earn over ₹10 lakh in the form of dividends).

This made buybacks a tax-efficient choice over dividend payments, especially for promoters who are usually among the large shareholders.

These developments have contributed to a spurt in buybacks and specifically in tender offers (where promoters can participate) in the last two years.

About 70 per cent of the buyback offers in fiscal years 2016 and 2017 have been through the tender offer route. In the many years prior to this, open market purchases have been more common. Anecdotal evidence shows that companies have preferred buybacks to dividends in recent times.

While eClerx Services declared a dividend of 100 per cent to 350 per cent in the past five years, dividends for the year ended March 2016 came down to 10 per cent. But a buyback amounting to ₹234 crore through the tender offer route was announced in end-August 2016 and promoters also declared the intention to participate.

Balrampur Chini, in its recently unveiled dividend distribution policy (formulated due to SEBI requirement for top 500 companies by market capitalisation to disclose the same), has clearly stated that shareholders may not expect dividend in the years in which the company conducts a buyback. The company just closed its buyback amounting to ₹175 crore, in February 2017.

The Big Story: 3 things to know about buybacks

Tenuous link with cash

Published on March 18, 2017

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor