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Banner year of share buybacks in India runs into tax roadblock

The proposed tax may affect share purchases worth Re 10,000 crore that are in progress.

Bloomberg|
Updated: Jul 09, 2019, 11.15 AM IST
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More than 70 companies announced or completed Rs 35,460 crore of share buybacks in the first half of 2019.
By Nupur Acharya

The decision by India’s government to impose a tax on stock buybacks puts the brakes on what could have been another great year for share repurchases.

More than 70 companies, including software exporter Wipro, announced or completed Rs 35,460 crore ($5.2 billion) of share buybacks in the first half of 2019, data compiled by Bloomberg show. That’s about two thirds of the Rs 54,600 crore of such transactions for all of 2018, which was the most in at least six years, the data show.

“In the last three years, buybacks had supported the rally in stocks and helped improve the earnings per share for companies,” said Umesh Mehta, head of research at Samco Securities in Mumbai. “That opportunity is now closed. Companies would now have to move back to distributing dividends, where the tax liability is lower.”

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The proposed tax may affect share purchases worth Rs 10,000 crore that are in progress. Infosys, India’s second-largest provider of IT services, has until September 19 to complete buying back Rs 8,260 crore of its own stock, while Adani SEZ & Ports is looking to repurchase shares worth Rs 1,960 crore, according to exchange filings.

Shares of Infosys extended two weeks of losses on Monday, while those of Adani SEZ closed at the lowest price since May 22.

Companies have been using buybacks as a more tax-efficient way to return excess cash to shareholders in addition to dividends, which attract a levy of 15 per cent. India’s top five software exporters have returned a combined Rs 867 crore over the past three years via this route, according to Jefferies.

Finance Minister Nirmala Sitharaman closed the window Friday by announcing a 20 per cent tax on stock repurchases. The trigger for the levy to kick in depends on when the company actually pays the money for the shares tendered, said Mehul Bheda, a partner and tax consultant at Dhruva Advisors in Mumbai.

“The tax saving on the buyback has been substantially reduced,” he said.
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