Recently a slew of companies across sectors came up with their buyback offers and the trend is likely to follow. So, what is a share buyback offer all about? Why do companies make such an offer? In what ways companies, shareholders and promoters profit from such an offer? Tax implications and other questions related to share buyback offers shall be answered in the following article.
SEBI has mandated a 15% buyback from retail investors whose market value as on record date is upto Rs. 2 lakhs.
Understanding buyback from company and shareholder's perspective
In a scenario when the current market price of the share appears cheap to the company plus it has surplus cash and no profitable projects at hand the company considers a buyback of its shares. There are also instances when company shows significant amount of outstanding debt in its balance sheet but still announces a buyback offer.
Tax Implications- On shareholders: Tax implications in a buyback offer correspond to the method in which the buyback of shares is taking place i.e through the stock exchange or not.
When the buyback offer is channelized directly without stock exchange
In case the company buys back its shares directly from shareholders, Securities Transaction Tax or STT is not levied. However long term capital gain realized in the hands of the shareholder becomes taxable. Capital gain is calculated as the difference between the buyback offer price and the cost of acquisition of shares. LTCG or Long term capital gains are taxed at the rate of 20% with indexation and 10% without indexation. While, STCG or short term capital gain is taxed as per slab rates.
When the buyback offer is channelized via stock exchange
In such a case, STT applies to the buyback offer. More so, long term capital gains realized in the course when shares are held for over a year, are tax-free in the hands of shareholders. Nonetheless, STCG are taxable at the rate of 15%.
On companies: Company making a buyback offer and repurchasing its shares are not taxed for the transaction.
Other factors to consider in a buyback offer include:
1. Promoter participation in the buyback: In case the promoters participate in the buyback offer as is the case in buyback made through tender offer, the offer turns out to be lucrative for the share. Open market platform for buyback offer is closed for promoters.
2. Offer price: Shareholders stand to gain from the buyback offer only when the buyback offer price is significantly higher than the current share price. Also, the buyback amount
3. Acceptance ratio: In case a shareholder has say 'N' number of shares of the company for which the buyback offer is tendered, not all N shares will be bought back by the company. In the case of TCS, the acceptance ratio for retail shareholders came to be less than 3%.
How does a buyback benefit investors?
A buyback reduces the equity capital of the company and when that happens it leads to better fundamental ratios like EPS, P/E etc. This may result in better valuations and higher dividend yields in the future.