As October approaches, Indian companies are in a race to finalize their share buybacks, driven by upcoming changes in tax regulations. Currently, corporations bear the tax burden for buybacks, but starting October, this responsibility will shift to shareholders. So, what’s fueling this rush if the tax burden will soon fall on shareholders?

In this blog, we delve into the new tax regulations affecting buybacks and why many Indian companies are pushing to complete theirs before October 1st.

The Overview

Share buybacks are fairly straightforward. Companies listed on the stock market can buy back shares from investors, often at a premium over the market price. The company reacquires its shares, and some investors walk away with a tidy profit.

Straightforward, right? But the complexity arises when it comes to taxation. Recently, the topic has gained traction due to a minor but significant change in tax policy announced in Budget 2024. Since then, around 16 companies have announced buyback plans, driven by this change.

Current Examples

Some prominent Indian companies currently executing buybacks include:

1. Infosys: Infosys has launched a share buyback plan worth ₹9,200 crores, scheduled to be completed by September 2024, just before the new tax rule takes effect.

2. Wipro: Wipro announced a ₹12,000 crore buyback plan, which it aims to wrap up by September-end.

3. Tata Consultancy Services (TCS): TCS is executing a buyback worth ₹18,000 crores, also planned to be finalized before the October deadline.

These companies are part of the rush to avoid the new tax implications that will soon come into effect.

The Crux of the Issue

You might wonder, what’s the big deal? Companies typically initiate buybacks for two main reasons:

1. To deploy excess cash by repurchasing shares.
2. To reward existing shareholders for their confidence in the company.

However, with the tax burden shifting to shareholders in October, the returns on buybacks for shareholders will effectively decrease. This likely explains why companies are eager to finalize their buybacks before the new tax rule kicks in.

Why Not Wait Until October?

But why not delay buybacks until October when companies will no longer have to pay taxes? Here's why: the primary shareholders in a company, such as promoters, institutional investors, and high-net-worth individuals, often participate in buybacks. These stakeholders usually fall into higher tax brackets, where taxes are steep. This changes the financial equation significantly.

For instance, under the new rules, a high-tax-bracket shareholder would face a total tax liability of ₹359, whereas a low-tax-bracket shareholder's liability would be ₹156. For top shareholders, it’s more beneficial for the company to pay ₹233 before October than for them to pay ₹359 afterward.

Thus, companies are keen to avoid saddling their most valued shareholders with higher taxes and aim to maximize shareholder value by completing buybacks before October.

Buybacks Post-October

This doesn’t mean buybacks will lose their appeal after October. The new tax amendment offers some relief by allowing the cost of acquiring shares in a buyback to be treated as a capital loss. This loss can be offset against any capital gains and carried forward for up to eight years.

For example, if you participate in a buyback and originally purchased the shares for ₹1,00,000, this amount would be considered a capital loss. You can then offset this loss against other capital gains, potentially reducing your taxable income. Any remaining loss can be carried forward to offset future gains.

This flexibility could keep buybacks attractive despite the new tax rules. Additionally, the new regulation may encourage companies to pursue buybacks only when their shares are genuinely undervalued. A buyback can boost the value of remaining shares by reducing the total number in circulation, following basic economic principles.

Conclusion

Ultimately, companies will continue to view buybacks as a strategic investment in their undervalued shares, rather than merely a means to gain tax benefits. This explains the urgency to complete buybacks before October. We’ll have to see how the buyback trend evolves post-October and how shareholders respond to the new tax landscape.