Buybacks at all-time high of Rs 34,468 cr in 2016-17

With increase in tax on dividend payouts, buybacks emerging as alternative to reward shareholders

Share buybacks by listed companies have hit an all-time high during FY17. A total of 45 companies launched share repurchase programmes this financial year totalling Rs 34,468 crore. Interestingly, the amount is more than the combined buybacks in the preceding seven years.

The new higher dividend tax regime and government increasingly opting for the buyback route for divestments are the two key reasons behind this sharp rise in buybacks during the current financial year, market participants said.

The government had introduced the concept of additional dividend tax (ADT) from April 1, 2016. According to it, dividend received in excess of Rs 10 lakh was taxable at 10 per cent rate in the hands of recipients. Although dividend was already taxed in the hands of the company through dividend distribution tax (DDT), ADT was introduced as an additional tax targeting those who received significant amounts of dividends. Hence, India Inc chose to go for buybacks.

"In the current scenario, buybacks are a more efficient way of rewarding shareholders compared to paying high dividends. This has led to a sharp increase in buyback issues during this financial year," said Girish Nadkarni, managing director, Motilal Oswal Investment Banking.

Buybacks also became a preferred route for the central government's divestment programme during this financial year as volatility in stock markets made it difficult for the government to sell stake. This has also helped in increasing the tally. According to department of investment and public asset management (DIPAM), the Union government has raised more than Rs 11,000 crore through buybacks in various public sector undertakings including NTPC and National Aluminium Company Limited.

"Government choosing buybacks for divestment is a one-time trend. With enough liquidity in the market currently, and recovery in the valuations of public sector entities, government could prefer going for direct selling of shares," said an investment banker.

Entering into 2017-18, the pipeline of buybacks looks strong as several companies including Tata Consultancy Services (TCS) and HCL Technologies have announced mega buyback plans. Buybacks worth at least Rs 25,000 crore are likely to be launched soon. The much-awaited share repurchase by TCS is expected to open in the next two months. The board of TCS has already approved buyback of shares worth Rs 16,000 crore from shareholders. This would be the biggest buyback offer in Indian markets. HCL Technologies has also announced its plans to buy back shares worth Rs 3,500 crore. Meanwhile, speculation is rife that Infosys too could launch a huge buyback programme to return part of its massive cash pile to shareholders.

Indian information technology (IT) companies have been under pressure from shareholders to announce buybacks in recent times. After US-based Cognizant announced its plans to repurchase shares, investors are demanding that Indian IT players undertake similar operations.

"IT companies are sitting on lot of idle cash and the IT sector as such is not a capital-intensive one. Further, there are not many acquisitions and takeovers going on in the sector currently. Hence, companies can redistribute a substantial part of their idle cash to shareholders through buybacks. This will also improve the earnings (net profit) per share of the company," said Prithvi Haldea, founder, Prime Database.