Buybacks for FY21 cross last yr's tally after announcements from TCS, Wipro

Buybacks for this financial year have zoomed past those of last year after mega share repurchase programmes were announced by Tata Consultancy Services (TCS) and Wipro.

After including the buybacks announced by the two IT giants, this year’s buyback tally stands at Rs 28,430 crore, 42 per cent more than what was reported in 2019-20. During the last financial year, buyback activity slumped 64 per cent following the introduction of 20 per cent tax. Despite widespread demands, there has been no roll back in the buyback tax. But a change in the dividend tax structure this fiscal onwards has once again tilted the scale back in favour of buybacks as a vehicle to reward shareholders, particularly promoters.

“Buybacks have emerged as a preferred choice for returning capital to shareholders ever since amendments were made to the Finance Act. Dividend is now taxable in the hands of the shareholders whereas the companies pay a tax on the ‘distributed income’ in case of buybacks. So it’s more tax efficient for the promoters, at least, Indian promoters, to take the cash out through a buyback as opposed to through dividends,” said Manshoor Nazki, partner, IndusLaw.

Last week, TCS announced a Rs 16,000-crore buyback. The company had announced a similar buyback in FY19, but had given it a miss last year. On Tuesday, Wipro announced a Rs 9,500-crore share repurchase programme. The Bengaluru-based company had conducted a Rs 10,500-crore buyback last year. However, it was exempted from the buyback tax as the buyback announcement was made prior to July 5, 2019, the cutoff date set by the government for imposition of the new tax.

From April 1, 2020, the government, while removing 10 per cent tax on dividend distribution, said dividends would be taxed at the hands of shareholders. As a result, promoters and other high shareholders, have to pay a tax of more than 40 per cent — the highest tax slab — on dividends.

Some believe the choice between buybacks and dividends under the current tax regime isn’t that simple.

“With the change in taxation of dividends, whereby, shareholders are taxed directly instead of tax being paid by the distributing company, dividends would be preferred from a tax perspective especially by the non-resident shareholder as some of the tax treaties provide for a tax rate as low as 5 per cent. However, resident shareholders continue to be taxed at high rates on dividend income and hence would prefer buyback as the route to receive distribution,” said Indruj Rai, partner, Khaitan & Co.

Market observers say cash-rich companies with high promoter holding may increasingly look at buybacks this year. Besides, being tax-friendly for the promoters, buybacks also boost financials, which is another plus.

“A buyback, much like a dividend distribution, fundamentally works to improve investor confidence. Given that any commercially viable buyback will be offered at least a reasonable premium to prevailing market prices – it signals to the market at large that the company has, and expects to continue having, strong financials in place. Apart from this, the immediate financial result of a successful buyback is also a net positive for the company – as its earnings per share automatically increase,” said Vaibhav Kakkar, partner, L&L Partners.