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- What is Buyback?
Buyback is a corporate action where a company buys back or repurchases its own shares from the shareholders A company will generally go for buyback to increase its earning per share, which will indirectly increase the value of share and it will create wealth for its long term investors. It will reduce the number of outstanding shares and increase the value of remaining shares.
- What is Dividend?
Dividend is a sum of money that a company pays to its shareholders out of its distributable profits once in a year and some times more frequently as an interim dividend. A company which pays dividend consistently may attract investors as they can have a regular source of income from the Company.
- Buyback vs Dividend
Companies mainly have two ways of rewarding their investors. Those are:
- Through dividend
- Through buyback
In this article, we will examine which option is better one from investors’ perspective
A unique difference between buyback and dividend is that when dividend is declared, it is paid to all the shareholders in proportion to the number of shares held by them, while in buyback, cash is paid to those shareholders who choose to apply for offer of buyback. Cash dividend is a way of distributing cash to shareholders which might be attractive to them and buyback results in increase in share price ultimately creating higher market capitalization for the Company.
When an investor invests in a Company that pays dividend consistently, he earns by getting a certain amount of money periodically. On the other hand, in case of share buyback, shareholders holding shares for a longer period of time would be rewarded with a lump sum amount which creates an exit opportunity and allow them to enter into other alternative investments.
Dividend v/s Buyback- Tax aspectTax aspect of Dividend: Dividend income is taxed in the hands of shareholders under the head Income from Other Sources. Until March 31, 2020, dividend income upto Rs 10 Lakhs was exempt in the hands of shareholders, but now it is taxable. Earlier dividend distribution tax was levied on the companies, and it was paid by the company, before distributing surplus profits to shareholders. Now tax incidence has been shifted from the company to the shareholders and shareholders pay tax on the dividend received from the companies under their respective individual tax slab rates.
Tax aspect of Buyback: The liability for taxation on buyback consideration is on the Company. Under Section 115QA of Income Tax Act, 1961, the Company is liable to pay tax at the rate of 20% plus surcharge, effectively 23.296% on the distributed income (which is buyback price less issue price of the shares) and on the other hand as per Section 10(34)A any gain arising in the hands of shareholders has to as a result of buyback by a Company is exempt from capital gains in the hands of shareholders..
To conclude from an investor’s point of view, we can say the following:
Apart from the increased earnings per share and return on capital to the Company, the major advantage of buyback is the tax benefits available to the shareholders and whenever the company has surplus cash, it tends to return the same either by declaration of dividend or buy-back.
Though the dividend declaration process is easy and convenient, the incidence of tax in the hands of the shareholders is heavy as it is taxed at income tax slab rates applicable to the respective shareholder. Whereas in case of buyback, the incidence of tax is on the company under section 115QA of the Income Tax Act, 1961, and as a result, the shareholders are not burdened by paying tax on profit made on the shares offered by the Company under buyback scheme.
Dividend v/s Buyback-Procedural aspects Dividend-The procedure of payment of Dividend by a company to its shareholders is simpler one as compared to that of buyback. A Company pays either interim dividend or final. Interim dividend is paid after getting Board’s approval, subject to ratification by its members and final dividend is declared after getting shareholders’ approval in General Meeting. This process of paying dividend does not require any immediate reporting, like filing return to Regulatory authorities like ROC etc.
Buyback– Compliance for buyback is complex activity as compared to the dividend distribution process. It requires Board’s and shareholders’ approval, declaration from auditor, certification by Practicing Company Secretary, several documentations like offer letter, filing forms with ROC etc.
- Benefits of Buyback/ Why shall a Company go for Buyback?
Buyback pushes the share price of shares of the Company upwards, by reducing the number of available shares in the market and increase share price of remaining shares. It has a long term futuristic view. The advantages or benefits of buyback are enumerated below:
- Increasing earnings per share
- Increasing the return on capital employed
- Increasing the return on net worth
- Creating wealth for long term investors
- Correcting the share price
- Enhancing the financial ratios
- Increasing confidence of shareholder
Thus, we can state that buyback is not only beneficial for shareholders or investors, but also beneficial to the company by increased earnings per share, return on capital employed and net worth.
There are several compliances that are to be done to carryout buyback. There are certain legal obligations that are to be met. For any organization it is not always that easy to carry these on without the help of a professional team. And maintaining an in-house team can be a costlier affair and hence it can be outsourced. Hence, to carry on the job it becomes very important to outsource your work to a professional team, with the required skillset.
SimplyBiz has a vertical named “Simply Buyback” which takes care of all activities regarding buyback. Simply Buyback is a one stop solution that offers comprehensive and end-end services to conduct a successful buyback. If you wish to meet your buyback compliances in a proper and timely manner by an expert team, SimplyBiz is the right partner for you. In case of any such requirement, please do write to our product head at simplybuyback@simplybiz.in and call us at +918121017571.
Disclaimer
The content of this document has been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.
One Reply to “Buy-back v/s Dividend –Which one to go for?”
It’s very Clear to understand the terms and the difference between buy back and Divided.
Provided information is very simple to understand. Thanks a lot ????????