Just as we are on the prowl – looking for stocks which hit lows to shore up our portfolio in these troubled times, promoters of various companies are also looking at their own stocks.
Buyback has become a good word on Dalal Street. With stocks being pounded to a pulp, many in oversold territory, companies are thinking, “why not now?”
Usually, buyback happens when – stock price is much below its intrinsic value or when companies have funds but with no capex plan or acquisition in sight, decide to use to money to shore up the holding. Many a times, it also happens when companies want to reduce the free float and this automatically keeps the stock price buoyant.
Currently, all three reasons for buyback are applicable. Emami is today among the gainers on the bourses as its Board is meeting today to decide on the intricacies of the buyback. Apart from Emami, in the past fortnight, ever since the crash began, a few more companies announced plans to buyback – SP Apparels, Sun Pharma, Supreme Petrochem and Thomas Cook.
These companies are bold because they are going ahead with the plan despite the prohibitive buyback tax on the listed companies. Or rather, they feel that despite the tax, it still makes economic sense to buyback.
In the July Budget, the FM had announced a buyback tax of 20% on all listed companies. Later, in Sept, the FM tweaked this a bit to say that all those who had bought back shares before 5th July 2019 will not have to pay the tax. So clarity came on the grandfathering but that, many say is not enough.
Before 5th July, there was no buyback tax (BBT) where shareholders needed to pay the long term capital gains tax like always. But in the Budget, the BBT tax worked out to 23.3%, which is 20% + surcharge +cess. So now the shareholders pays for his dividend as well as buyback gains too.
For eg: Suppose the shares were issued in an IPO at Rs.50. The company goes for a buyback at Rs.500. As per the new tax rules under Sec 115Q, companies will have to pay 23.3% tax on Rs.450 (500-50).
And if you had bought the shares at Rs.300 and sold it at Rs.550, like the usual LTCG rule, you will pay 10% on Rs.250 (550-300).
So the taxman gets money from the shareholder every time he sells over his buying price and at the same time, he collects from the company too on the IPO and buyback price difference.
Thus the need of the hour is to do away with this BBT, especially at this critical time. If the purpose of the BBT was to deter promoters from indulging in buybacks and instead use the money to invest in expansions, modernisations and other investments.
Well, in case the FM has not noticed yet, things are bad. There is no inkling of any investment on the horizon and stocks are falling like nine pins. At this time, we need promoters to buyback to shore up their stock prices and instill a sense of confidence in the investors.
Doing away with this taxation, at least for the short term will help the markets in a long way.