Ever since Finance Minister Nirmala Sitharaman announced that gains from share buybacks will be taxed in the hands of shareholders from October 1, at least 16 companies have already completed buyback offers while another 11 have announced share repurchase offers.
On the other hand, only about 18 companies had come out with buybacks between January 1 till the Budget was announced on July 23.
During the period, the biggest share buyback announcement came from Indus Towers – Rs 2,640 crore – carried out via the tender route from 14-21 August. Aurobindo Pharma‘s Rs 750 crore share buyback ran from 5-9 August.
Other companies that have completed buyback in the last one month include AIA Engineering, Welspun Living, TTK Prestige, Suprajit Engineering, Cera Sanitaryware, VLS Finance, Navneet Education and Dhanuka Agritech.
Besides them, other companies like Transport Corporation of India, Jai Corp, Aarti Drugs, Matrimony.com and Insecticides India have announced share repurchase programs. Market watchers say more such announcements are in the pipeline in the next few days before the rules change from next month.
Under the current tax rules, companies have to pay a tax of about 23% but under the new rules the burden will shift to benefiting shareholders who will have to pay tax according to their tax slab.
Dividends are similarly taxed on the hands of shareholders.
“Treating buyback proceeds as dividend income brings enhanced clarity and uniformity to the tax landscape. Additionally, the new tax rules would encourage companies to undertake buybacks only when they believe their shares are genuinely undervalued and not merely to take advantage of a lower tax rate. This focus on long-term shareholder value creation could lead to more prudent and strategically sound buyback decisions,” Bijal Ajinkya and Viraj Doshi of Khaitan & Co. said.
While on one hand, this will increase corporate cash flow as companies won’t have to pay tax on conducting buybacks but on the other side it will be tougher to find investors participating in share repurchase programs.
As the tax liability shifts to shareholders, particularly those in higher tax brackets (HNIs), the new rules impact the overall appeal of buybacks.
“This increased tax burden could make buybacks less appealing. In certain cases, even if the companies do not have potential deployment areas, they may prefer to retain cash at the company level rather than undertaking a buyback and decreasing the effective return for the shareholders,” corporate law firm Khaitan & Co. said.
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