India Inc's share buyback programmes gather pace

Around a dozen firms announce buybacks worth Rs 20,000 crore so far in 2016-17

The trend to opt for share buybacks in lieu of dividends has been gathering pace in the first quarter of this financial year. So far in 2016-17 (the year began on April 1), at least a dozen listed companies have announced such programmes, worth nearly Rs 20,000 crore in all.

In the past month, seven companies, including government-owned NMDC and MOIL, have approved buybacks. A buyback is a process in which a company purchases shares from its shareholders at a pre-decided price. Buybacks, like dividends, are a way of returning money to shareholders.

The trigger for the increase in number of buybacks is the additional 10 per cent tax on dividends announced in the Union Budget, on individuals receiving such income in excess of Rs 10 lakh in a financial year. This is in addition to the 20 per cent tax on dividend distribution.

“The market finds newer ways of saving on taxes,” said Prithvi Haldea, chairman, Prime Database. “Buybacks are also in vogue as investors are finding them more tax-efficient.”

The higher 10 per cent tax on dividends is expected to eat into as much as Rs 6,000 crore of promoters’ income this financial year, showed an analysis by this newspaper. “Companies are opting for buybacks as an alternative route. The Centre might come up with something in next’s year budget to close this route,” said Harish HV, partner, Grant Thornton India.

Almost all the buybacks announced this year are being done through the so-called ‘tender route’, to allow participation of promoters. In contrast, a little over 90 per cent of the buybacks in the past five years have been through the ‘open market route’, meant only for non-promoters.

The tender route allows participation by promoters and also has a 15 per cent reservation for small investors. Also, under the tender route, shares have to be purchased at the maximum price set by the board of directors. Under the open market route, a company buys shares at the prevailing rates in the open market, provided these are below the maximum buyback price it has set.

“There are limits to how much of buybacks a company can do. They will have to study the restrictions one has to observe following a buyback and not only do it from a tax saving perspective,” said Harish.