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The Economic Times |
Pranay Bhatia, International Liaison Partner
Partner - Tax & Regulatory Services

22 April 2016

Buybacks are another way of giving back cash to investors. "Considering the three levels of taxation — corporate tax, dividend distribution tax by companies and 10% tax on dividend in excess of Rs 10 lakh in the hands of the recipients — companies are likely to cut down on dividend distribution and go for buybacks," said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial ServicesBSE 1.73 %.

Buybacks improve return ratios as they shrink the equity capital base and improve earnings per share. A company could opt for this route because of weak business prospects but, given the context, the main aim would be distributing cash to big shareholders.

"Many companies could prefer buybacks to dividend in the current scenario as the former is more economically viable," said Vikas Khemani, CEO, EdelweissBSE 3.28 % Securities. "Though retail investors may face some issues with buybacks, large investors would be happy with the buybacks as they save on taxes."

The Wipro board on Wednesday approved the buyback of up to 4 crore shares for an aggregate Rs 2,500 crore. Wipro paid nearly Rs 3,000 crore as dividend in the year ended March 31, 2015.

"In the buyback of shares of listed companies, there is no tax, whereas in dividend distribution, they have to pay DDT which is 15%. Further, 10% income tax in case of dividend income earned should be paid by the individual shareholders if the total dividend income exceeds Rs 10 lakh," said Pranay Bhatia, partner, BDO India LLP. "So, net to net, individual shareholders would benefit from buybacks."  

On April 18, Dr Reddy's Laboratories started its buyback programme, having announced the exercise even before the Budget. It plans to buy shares worth Rs 1,569 crore.

Cash-rich companies such as Reliance IndustriesBSE 1.14 %, InfosysBSE -0.70 %, ICICI BankBSE -0.14 %, Tata Consultancy ServicesBSE 0.53 %, HDFC BankBSE 1.84 %, Bharti AirtelBSE -0.95 %, Cairn and Vedanta have paid between Rs 1,000 crore and Rs 5,000 crore as dividends in FY15. Not every company is expected to get on the buyback bandwagon.

"Buyback trend may get traction going forward due to tax efficiency, but those who want to maintain the dividend payout history may stick to paying dividend," said Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital.

For investors receiving dividends in excess of Rs 10 lakh per annum, the Budget proposed tax at the rate of 10% of the gross amount in addition to dividend distribution tax (DDT). "In the near term, I feel only those companies in which promoters have substantial stake in their personal names and have failed to announce the dividend before March 31, could go for buybacks," said Nilesh Shah, CEO, Kotak Mutual Funds.

The best example of the practice of returning money to shareholders through buybacks is Warren Buffet's Berkshire Hathaway, which has not paid dividends since 1967. But it maintains an aggressive stock buyback policy that puts cash directly into shareholders' pockets. Berkshire shareholders often receive as much as 120% of the market value for shares they wish to sell back to the company.