Globally, share buybacks are an extremely popular mechanism for companies to return capital to shareholders, right-size their balance sheets and signal confidence in their financial health. For example, Apple has done buybacks worth US$430bn (billion) over the past five years, boosting its share price. However, like every other aspect of economic activity in India, the only policy objective of the State has been to extract as much money as possible by taxing buybacks, leaving companies lukewarm to the idea and depriving shareholders in the process. This becomes immediately apparent in a bear market when the stock prices of outstanding companies with strong cash-flows are down but none of them feels impelled to launch a buyback offer. What can be done to encourage companies to buy back their shares in a move that would be beneficial for shareholders?
The legal and regulatory framework governing buybacks is primarily under the Companies Act of 2013 and the Securities and Exchange Board of India (SEBI) Buyback of Securities Regulations, introduced in 1998 and updated in 2018 and 2023. Before this, the Companies Act of 1956 did not allow companies to repurchase their own shares, as it was seen as a potential misuse of corporate funds that could harm creditors or minority shareholders. The concept gained traction globally, particularly in the US, prompting India to reconsider its stance in order to align with international practices and provide companies with greater financial flexibility.
In 1998, SEBI introduced the Buyback of Securities Regulations which allowed companies to repurchase their shares either through the open market or via a tender offer. In 1999, Reliance Industries Ltd (RIL) did a buyback of shares, but the practice has remained unpopular due to onerous regulations, lack of growth and low cash levels in companies.
In the 2000s, when our economy started doing better, a few more buybacks happened including a Rs3,000 crore buyback by Reliance Industries through open market purchases.
In the 2010s, buybacks became a bit more popular, due to a combination of factors: economic growth, tax incentives and a maturing stock market. The Companies Act of 2013 replaced the 1956 Act and further streamlined the process under Section 68, allowing companies to buy back up to 25% of their total paid-up capital and free reserves in a financial year.
Buybacks also came to be seen as a better alternative to dividends due to their tax efficiency. Until 2016, dividends were subject to dividend distribution tax (DDT) paid by companies (around 15%-20% including surcharge and cess), while buybacks attracted lower tax, making them more attractive. The Finance Act of 2016 introduced an additional 10% tax on dividend income exceeding Rs10 lakh for individuals, making buybacks more popular.
In 2016-17, over 40 listed companies announced buybacks worth Rs30,000 crore—the highest value in a single financial year up to that point. This included Reliance Industries, which announced a Rs10,440 crore buyback plan between 2012 and 2013, though it achieved only 38% of its target, acquiring shares worth Rs3,900 crore.
Tata Consultancy Services (TCS) planned a Rs16,000 crore buyback in 2017, the largest ever through the tender route. TCS repeated large-scale buybacks in subsequent years following a strategy of returning 80%-100% of free cash-flow to shareholders. Infosys also announced a Rs13,000 crore buyback in 2017.
Interestingly, in 2017, the number of buyback offers exceeded initial public offerings (IPOs) for the first time in Indian capital market history. In 2019, around 70 companies did buybacks in the first half of the year which has been the highest number ever; almost all of them rushed to complete their offers (worth over Rs35,000 crore) before the 2019 Budget provisions taxed buybacks at 20%. In contrast, in the full year of 2018, only 63 companies bought back their shares.
As expected, following the 2019 amendment, the number of buybacks fell to only 48 in 2023. There was another round of tax changes in 2024. Buybacks are now taxed as dividends at their income tax slab rates – they were taxed as capital gains earlier at 23.3%. High-net-worth individuals (HNIs) and institutional investors now face higher tax liabilities (up to 37% for top brackets).
In contrast, the US has only a 1% tax on buybacks which also came about only recently under the Inflation Reduction Act of 2022. Also, from 1 April 2025, open market buybacks through exchanges have been banned which limits corporate choices. If the government thought that it was freeing the corporate sector from buyback tax and shifting it on to shareholders, it was a short-sighted view. While tax on buyback is not voluntary, choosing to participate in an offer is. Shareholders would hardly be excited about such a hugely taxed source of income.
Share buybacks allow companies to enhance shareholder value, signal confidence and optimise their capital structure. Companies with excess cash, like software giants and public sector companies, have utilised buybacks to reduce idle reserves, when there are no worthwhile investment opportunities.
Buybacks, which use tax-paid past profits, ought to be left alone. But greedy, cash-strapped governments see buybacks as a means of grabbing taxes. It is time for a relook in a declining market. If the government puts a flat 10% tax on buybacks, irrespective of income slab, hundreds of cash-rich Indian companies would go for it, probably increasing the government’s tax intake.
A low flat tax policy will give a boost to the market at no additional cost and cheer millions of shareholders. These are the crucial points where an extractive State can turn into an inclusive State.
Will it happen?
(This article first appeared in Business Standard newspaper)
Comments
InvestMoney
3 weeks ago
It is both in share holders and the govt (who will get some tax) interest , that free cash be returned as either dividend or buy back to investors. The main fear in this stagnant ecomony is that this cash could be misused in some adventerous / un related investment by management / promotors that may only lead to losses!
This document examines the practice of share buybacks conducted at a premium, particularly in relation to its potential use as a mechanism to mitigate dividend income tax liabilities. Prior to the 2020 amendment, dividends were subject to a 15% Dividend Distribution Tax (DDT) levied at the company level. However, the abolition of DDT in 2020 shifted the tax burden to the recipient, treating dividends as regular income. While this change may have a negligible impact on small investors, high-net-worth individuals, who often hold significant stakes and exert considerable influence over corporate decisions, face a potential tax liability of up to 30% on dividend income. This creates a scenario where these individuals may favor premium share buybacks over dividend payouts. As exemplified by Tata Consultancy Services (TCS), where promoters hold approximately 73% of the shares, the potential for such influence is substantial.
Buyback Mechanisms and Tax Treatment:
Companies typically employ two buyback methods: open market operations and tender offers. In open market operations, companies acquire shares from exchanges, excluding promoter participation. Conversely, tender offers, frequently conducted at a premium, allow promoters to tender their holdings proportionally.
A critical issue arises in the current income tax assessment of tender buybacks. The prevailing practice treats the entire buyback price, including the premium, as the sale price of the shares, resulting in the calculation of capital gains (either short-term or long-term). This approach overlooks the distinct nature of the premium, which should be treated as separate income.
Proposed Tax Assessment Methodology:
To rectify this discrepancy, we propose a bifurcated tax assessment approach. This entails separating the buyback price into two components: the fair market value of the shares and the premium. The premium should be taxed as regular income, while the remaining portion should be subjected to capital gains tax (STCG or LTCG), depending on the holding period.
To establish the fair market value, either the share price on the announcement date or the ex-date price can be utilized. However, relying on a single-day price can be susceptible to market manipulation. Therefore, we recommend using a 90-day average closing price, either preceding the announcement date or following the ex-date, to mitigate such risks.
Case Study: TCS Buybacks:
Analysis of TCS's buyback history reveals a pattern of tender offers at a premium. Using the ex-date closing price as a basis for assessment, we observe a significant tax implication.
As demonstrated in the table, the large shareholders of TCS have accrued substantial gains through premium buybacks, potentially at the expense of income tax revenue. This warrants a reassessment of the current tax treatment of premium buybacks.
Conclusion:
The current income tax assessment of premium share buybacks presents a potential avenue for tax avoidance, particularly for large shareholders. Implementing a bifurcated tax approach, which distinguishes between the fair market value and the premium, would ensure a more equitable and accurate tax assessment. Utilizing a 90-day average price would also reduce the ability for market manipulation. This analysis of TCS highlights the significance of this issue and the need for regulatory intervention to safeguard tax revenue and maintain market integrity.
Nothing stops the companies to buy back shares from the open market.
The companies were using buybacks at a premium as a method to evade taxes and the biggest beneficiaries were the promoters.
In case of buy back at a premium, the share holders paid 15% STCG on the premium. To take advantage of the this the buy back was routed through stock exchanges to pay STT as that is the prime condition to avail STCG on equity.
This loophole was being exploited to evade 30% tax on the dividend. How is the exchange involved in buy back at a premium as they are truly off market transactions.
It is fair thing that the Govt introduced to tax such premium as dividends. That is why buyback at a premium has disappeared from the market.
In a calculation, I computed that promoters of TCS saved as much as a 1000 Crores in three years they came out with buy backs at a premium.
Companies are free to do buy back from open market operations.
You need to do some deeper research.
Anil Bansal
Plus shifting of the tax from the payer to the payee. In the digital world , there is a way of monitoring at corporate level which is administratively efficient. When you shift to taxing the payee, it leads to the administrative burden on the payee , which is burdensome for small payees. Aggregate the efforts put in by the payees , there is an investment of productive time , apart from the possible associated expenses in terms of reliance on CA for tax return preparation . Wondering if such a macro economic sense prevails among the tax administrators or the policy makers. Similar is the case with LTCG on capital gains from equity shares. It is nightmarish at times for small investors handling small quantities.
Thanks for your eye opening topic . Which triggered the above thoughts. Policy makers seem to have become pawns in the hands of tax administration , which has a limited perspective
you need to examine closely. the promoters avoid paying taxes to govt which they would have to pay if they declared dividends. The companies can still buy back their shares and reward their shareholders through open market operations. The govt is not the mafia but the company promoters are. cheers
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Buyback Mechanisms and Tax Treatment:
Companies typically employ two buyback methods: open market operations and tender offers. In open market operations, companies acquire shares from exchanges, excluding promoter participation. Conversely, tender offers, frequently conducted at a premium, allow promoters to tender their holdings proportionally.
A critical issue arises in the current income tax assessment of tender buybacks. The prevailing practice treats the entire buyback price, including the premium, as the sale price of the shares, resulting in the calculation of capital gains (either short-term or long-term). This approach overlooks the distinct nature of the premium, which should be treated as separate income.
Proposed Tax Assessment Methodology:
To rectify this discrepancy, we propose a bifurcated tax assessment approach. This entails separating the buyback price into two components: the fair market value of the shares and the premium. The premium should be taxed as regular income, while the remaining portion should be subjected to capital gains tax (STCG or LTCG), depending on the holding period.
To establish the fair market value, either the share price on the announcement date or the ex-date price can be utilized. However, relying on a single-day price can be susceptible to market manipulation. Therefore, we recommend using a 90-day average closing price, either preceding the announcement date or following the ex-date, to mitigate such risks.
Case Study: TCS Buybacks:
Analysis of TCS's buyback history reveals a pattern of tender offers at a premium. Using the ex-date closing price as a basis for assessment, we observe a significant tax implication.
TCS Buyback Data:
| Year | Announcement Date | Price (INR) | Buyback Type | Amount (INR Cr) | Shares (Millions) | Buyback Price (INR) | Record Date | Record Date Price (INR) | Small Investor % | Rest % | Total Premium (INR Cr) | Premium to Large Shareholders (INR Cr) | Tax Impact (30%-10%) (INR Cr) |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 1-Dec-22 | 3859 | Tender | 18000 | 40 | 4500 | 23-Feb-22 | 3588 | 11 | 89 | 3648 | 3246.72 | 649.344 |
| 2020 | 10-May-20 | 2523 | Tender | 16000 | 53.33 | 3000 | 28-Nov-20 | 2873 | 8 | 92 | 677.33 | 602.83 | 120.57 |
| 2018 | 6-Dec-18 | 1746 | Tender | 16000 | 76.19 | 2100 | 18-Aug-18 | 2013 | 8 | 92 | 662.86 | 589.94 | 117.99 |
| 2017 | 16-Feb-17 | 2400 | Tender | 16000 | 56.14 | 2850 | 8-May-17 | 2525 | 8 | 92 | 1824.56 | 1623.86 | 324.77 |
Analysis:
As demonstrated in the table, the large shareholders of TCS have accrued substantial gains through premium buybacks, potentially at the expense of income tax revenue. This warrants a reassessment of the current tax treatment of premium buybacks.
Conclusion:
The current income tax assessment of premium share buybacks presents a potential avenue for tax avoidance, particularly for large shareholders. Implementing a bifurcated tax approach, which distinguishes between the fair market value and the premium, would ensure a more equitable and accurate tax assessment. Utilizing a 90-day average price would also reduce the ability for market manipulation. This analysis of TCS highlights the significance of this issue and the need for regulatory intervention to safeguard tax revenue and maintain market integrity.
The companies were using buybacks at a premium as a method to evade taxes and the biggest beneficiaries were the promoters.
In case of buy back at a premium, the share holders paid 15% STCG on the premium. To take advantage of the this the buy back was routed through stock exchanges to pay STT as that is the prime condition to avail STCG on equity.
This loophole was being exploited to evade 30% tax on the dividend. How is the exchange involved in buy back at a premium as they are truly off market transactions.
It is fair thing that the Govt introduced to tax such premium as dividends. That is why buyback at a premium has disappeared from the market.
In a calculation, I computed that promoters of TCS saved as much as a 1000 Crores in three years they came out with buy backs at a premium.
Companies are free to do buy back from open market operations.
You need to do some deeper research.
Anil Bansal
Thanks for your eye opening topic . Which triggered the above thoughts. Policy makers seem to have become pawns in the hands of tax administration , which has a limited perspective