Share Buybacks: Global Popularity and Indian Context
Globally, share buybacks are a favored method for companies to return capital to shareholders, optimize their balance sheets, and demonstrate financial confidence. For instance, Apple executed buybacks worth $430 billion over five years, significantly increasing its share price.
Challenges in India
- Indian policy heavily taxes buybacks, making companies less inclined towards this mechanism, especially during bear markets.
- The legal framework is primarily governed by the Companies Act, 2013, and the Securities and Exchange Board of India (Sebi) Buyback of Securities Regulations introduced in 1998 and updated in 2018 and 2023.
Historical Perspective
The Companies Act, 1956 originally prohibited buybacks due to concerns over potential misuse of corporate funds to the detriment of creditors or minority shareholders. However, the practice gained global traction, especially in the US, prompting India to adapt.
Regulatory Developments
- In 1998, Sebi allowed buybacks through open market or tender offers.
- Despite allowances, stringent regulations and low cash flow limited their popularity.
- Economic growth and tax incentives in the 2000s and 2010s increased buyback activity.
Taxation Dynamics
Initially, buybacks were more tax-efficient compared to dividends. However, the Finance Act, 2016 introduced a 10% tax on dividend income over ₹10 lakh, enhancing buyback appeal.
Trends and Changes
- 2016-17 witnessed buybacks worth ₹30,000 crore, with significant contributions from Reliance Industries and Tata Consultancy Services (TCS).
- Following a 2019 amendment, buyback numbers dwindled to 48 by 2023.
- Recent tax changes equate buybacks to dividends, with rates as high as 37% for high-net-worth individuals.
Comparative Global Context
The US imposes only a 1% tax on buybacks, contrasting with India's hefty rates.
Implications and Recommendations
- Buybacks can bolster shareholder value, signal corporate confidence, and optimize capital structures.
- Governments view buybacks as tax opportunities, but a flat 10% tax could encourage corporate participation, increasing tax revenues without additional costs.
These insights suggest potential for policy transformation, shifting from an extractive to an inclusive state approach.
