India Inc's buyback party: A Rs 25,000-crore splurge in first half of 2017

In a fivefold jump over previous year, spurt comes even as stocks rally 20%

In a record buyback of shares, listed companies have repurchased equity worth over Rs 25,000 crore in the first half of 2017.

It is a fivefold jump over the buyback amount in the corresponding period, a year ago. In fact, the amount is higher than the combined value of shares repurchased in the first half of the previous five years. 

The spurt has come at a time when the benchmark Sensex rallied nearly 20 per cent. 

This is unusual as buyback is typically a bear market phenomenon, when prices of shares dip excessively and companies step in to shore them up. However, with higher taxes being imposed on dividends many companies are opting for buybacks as a tool to reward shareholders. Also, the government has been aggressively using public sector undertaking (PSU) buybacks instead of traditional disinvestment for meeting the 2016-17 divestment target.

“The taxes on dividends introduced in last year’s Union Budget and buybacks by cash-rich PSUs are the two main reasons for the spurt in buyback activity,” said Pranav Haldea, managing director at Prime Database, a primary market tracker. 

Buyback is a way through which a company returns a part of its profits to shareholders. Besides returning surplus cash, it can also have a positive impact on the earnings per share and return on equity of a company.

Buybacks became a preferred route for the central government’s divestment programme last fiscal year as volatility in PSU stocks made it difficult for the government to sell stake in the secondary market. Notable PSU buybacks of 2016 include that of National Mineral Development Corporation, Coal India, Nalco, NHPC, Oil India and NLC India. 

A host of private firms, too, bought back shares after the Union Budget changed the taxation norms for paying dividends, making any amount in excess of Rs 10 lakh received by individuals, HUFs, partnership firms and limited-liability partnership members in India via dividends in a financial year taxable. The rate of taxation of dividend is 10 per cent, plus the applicable surcharge and cess. 

In addition, domestic companies have to pay 15 per cent tax on dividends they distribute.

After taking into consideration grossing up, surcharge and cess, the effective rate of dividend distribution tax (DDT) for companies comes to about 20 per cent. 

“Buybacks are a more efficient way of returning cash to shareholders, as dividends are taxed at the company level and also in the hands of shareholders if their dividend income exceeds Rs 10 lakh,” said Girish Nadkarni, managing director, Motilal Oswal Investment Advisors.  

Information technology (IT) major Tata Consultancy Services was the most significant contributor to buyback activity this year, purchasing shares worth Rs 16,000 crore from shareholders. 

IT firms have under pressure from shareholders in the recent past to return the excess cash on their books, either through dividends or buybacks. 

These are expected to report muted results in the June quarter owing to wage hikes, an appreciating rupee and visa fees as well as the uncertainty revolving around the protectionist measures in the US. 

It won’t be surprising, say analysts, if more cash-rich IT majors line up for buybacks in the coming months. Infosys has already announced that it would give back up to Rs 13,000 crore to its shareholders in 2017-18 by way of dividend and/or share buybacks.  “Companies that face a growth challenge and do not have enough avenues to deploy cash will resort to buybacks,” said Munish Aggarwal, director, Equirus Capital.   

The Securities and Exchange Board of India (Sebi) had changed the buyback norms in 2012 to ensure only companies with serious intentions announce share repurchase programmes. Besides widening the disclosure requirements, Sebi lowered the duration of a buyback to three months from one year earlier. 

The new regulations have also encouraged companies to opt for “tender” buybacks instead of “open market”, as the latter was prone to manipulations. In tender offers, companies buy back shares, usually at a premium, from investors who choose to sell them. In an open market purchase, the company buys shares from the market at the best available price.