Companies push ahead with proposed share buyback plans after tax relief

Companies are pushing ahead with their proposed share buyback plans, following the government’s decision to provide grandfathering benefit to buybacks announced between April 1 and July 5 (the day of the Budget). More than half a dozen firms have filed a “letter of offer” with the markets regulator Securities and Exchange Board of India (Sebi), announcing their buyback schedule. Further, companies such as KPR Mill, which had withdrawn their buybacks following the unexpected tax outgo, have restored their buyback plan. 

In an ordinance dated September 20, the government said the buybacks announced prior to July 5, 2019, were being exempted from the tax implication announced in the Finance Bill 2019.

“As our buyback falls under this category, we had sent a letter to Sebi requesting to proceed with the buyback as originally contemplated, as we have adequate cash reserves to meet the buyback obligation assuming tax exemption,” KPR Mill said in a statement. 

Other companies such as Greaves Cotton and SKS Securities had not withdrawn their buybacks but had sent queries to the regulator on whether they could get certain relaxations, considering the change in taxation. 

Sebi had forwarded the queries to the government, as allowing companies to withdraw buybacks would have been a violation of the securities law.

Legal experts say the tax benefit has helped restore buyback plans for many companies.

Buybacks of eight companies are operational at the moment. Six of these have opened in the past one week — of Greaves Cotton, Automobile Corporation, and Welspun India. 

“The clarification helped salvage the situation for those that were at the verge of withdrawing the buyback. Withdrawal of a buyback is generally not advisable because of certain potential repercussions under the fraudulent and unfair trade practices regulations,” said Yogesh Chande, partner at Shardul Amarchand Mangaldas. It remains to be seen how many companies announce their buybacks following the introduction of the 20 per cent buyback tax. Typically, the second half a financial year is when most companies announce their buybacks.

“The partial rollback is useful for companies that had announced their plans before the Budget. However, it is a dampener for others,” said Vidisha Krishnan, partner at MV Kini & Co.

Given the tax advantage, buybacks had become a go-to tool for corporate India to return cash to shareholders in lieu of dividends, which are highly taxed. However, the government has more or less removed the tax advantage buybacks enjoyed over dividends, by introducing the 20 per cent tax on buyback distribution. In the past few years, technology companies have announced mega buybacks. 

Recently, Sebi eased the buyback rules, particularly for non-banking financial companies (NBFCs). Market players said the new tax would offset the relaxation provided by Sebi.

“The regulator had homogenised the existing Sebi buyback regulation with buyback under the new Companies Act 2013. We were expecting the buyback market to pick up. But with the tax imposition, we don't see the effect of revised regulation help buybacks in a big way,” said Krishnan.