Tax shift throws a wrench in the gears of buyback offers in 2024

After reaching a six-year peak in 2023, the amount spent on buyback offers by companies shrank last year following the government’s decision to shift the tax burden from companies to investors.

 

In 2024, 48 companies repurchased shares worth Rs 13,423 crore, compared to Rs 48,079 crore spent on share buybacks by the same number of companies in 2023.

 

The central government’s move to tax share buybacks at the shareholder level, similar to dividends, discouraged companies from pursuing buyback offers. Robust equity markets, which reduced investor willingness to tender shares, also contributed to the decline in share repurchases.

 

“The benefits of buybacks that existed previously are no longer available. Dividends are now more efficient because, unlike buybacks, there is no need to engage merchant bankers to facilitate the process. Also, companies are not subject to Securities and Exchange Board of India compliance. Dividends can be distributed quickly, whereas buybacks take weeks to complete. Moreover, in a market where share prices have risen, investors have little incentive to tender shares unless companies offer a huge premium to the market price,” said Deepak Jasani, former head of retail research at HDFC Securities.

 

The changes in buyback taxation, which increases the tax burden on recipient shareholders, took effect on October 1, 2024. Since the new rules were implemented, only one buyback offer has been completed: Matrimony.com’s Rs 72 crore buyback. No buybacks occurred in November and December 2024. November 2024 marked the first month since May 2018 without any share repurchase offers. 

 

Before October, companies undertaking buybacks were subject to a tax of over 20 per cent. Meanwhile, shareholders who tendered their shares were not liable for any taxes. In response to the higher tax burden on dividends, many cash-rich firms, particularly in the information technology sector, favoured buybacks as a way for promoters to reduce tax liabilities. The increase in buyback value in 2023 was largely driven by several large-scale issues, including Tata Consultancy Services’ Rs 17,000 crore buyback.

 

A buyback is a process through which a company repurchases its shares from stakeholders. The repurchased shares are cancelled, reducing the company’s equity base and improving financial metrics such as earnings per share and return on equity. This process can be carried out either through the tender route, where shareholders surrender their shares in response to the company’s offer, or through the open market, where the company buys shares directly from the market.

 

Some of the large buyback offers in 2024 included those from Bajaj Auto ( Rs 4,000 crore), Indus Towers ( Rs 2,640 crore), Aurobindo Pharma ( Rs 750 crore), Chambal Fertilisers and Chemicals ( Rs 700 crore), and Zydus Lifesciences ( Rs 600 crore). The remaining deals last year were all under Rs 500 crore.

 

Looking ahead, the recent market correction may prompt some promoters to consider share repurchases as a way to reward shareholders.

 

“Many investors saw a wealth wipeout during the recent market meltdown. If overall market capitalisation declines further, promoters may consider buybacks to reward shareholders and increase their stake. Investors should assess whether the buyback is symbolic or if a substantial portion of the share capital is being repurchased. Some companies have repurchased up to 8 per cent of their total share capital. In such cases, the impact on earnings per share will be more pronounced,” said Chokkalingam G, founder of Equinomics Research.