Buyback is a strategic tool which is used by the entities to fulfil their business objectives. Though, it is a mere process of buying back the shares from the shareholders of the Company, this corporate action comes with few hidden benefits such as increasing the Earning per shares, providing exit to the passive investors and primarily returning the surplus to the shareholders of the Company. Below are few important use cases of opting for Buyback:
Use case 1: Return of surplus fund to the Shareholders.
Companies might have significant amount of accumulated profits in the form of Free reserves or surplus and when the Company does not have any immediate commitments or viable investments plans in the pipeline, Companies often tend to go for buyback and return the surplus fund to the shareholders.
- Infosys has returned more than Rs. 9300 crores to its shareholders.
- Bajaj Auto has returned more than Rs. 2500 crores to its shareholders.
Use case 2: Exit to the Passive Investor using Company’s fund.
Companies which have raised money from their close group of friends or those who have passive investors having minority shareholding and are willing to exit, in such scenarios, the Company can use buyback for purchasing the shares issued to them and provide exit using the Company’s fund (free reserves or surplus).
Use case 3: Transfer of funds to the Overseas holding companies
Companies which are wholly owned subsidiaries of the overseas entity and having significant amount of surplus in the form of reserves, may return the excess funds to its holding companies as the parent entity would want to call back and retain the accumulated profits of its investments in the subsidiary.
Use case 4: Increase Promoter shareholding
Promoters intending to increase their shareholding in the Company with certain business objective, can use buyback as a tool. Through this, the Company can repurchase the shares held by the non-promoter group of shareholders thereby increasing the shareholding of promoter group.
Byju’s Co-founder and CEO, Mr. Raveendran is planning to increase his stake in the Company to 40% with the company intending to buy back shares equivalent to 15% of the paid-up capital.
Use case 5: Tax optimization strategy:
In the present tax scenario, the consideration received by the shareholders who has participated in buyback of the shares is exempt from tax and only the Company is liable for payment of tax on buyback which is 23.296%. Companies where individual promoter holds majority of share capital and the effective tax as per individual slab rate is expected to be more than 30%, Buyback can be an option to reduce the ultimate incidence of tax liability in the hands of the individual promoter.
Recent trends on the taxation aspect:
The Ministry of Finance is considering the option of shifting the tax liability on buy back of shares from the company to the individual shareholder offering shares for buy back thus going back to the pre-2013 scenario as far as unlisted companies are concerned. It had been extended to listed companies from Financial Year 2020, however, as there is double taxation, the shareholders were liable to pay capital gains tax when such companies make buy-back from the open market. It may be recollected that Dividend Distribution Tax has been done away with in the financial year 2020-21 and tax liability on dividend fell on shareholders. This move will bring taxation of buy back at par with tax on dividend income and it will remove double taxation on buy back. It is likely to be announced in forthcoming Budget.
SEBI, in its consultation paper, has sought comments of public on the proposal inter alia whether
- Incident of tax should be shifted to shareholder
- amount payable by the company to the shareholder offering shares in a buy back should be net off buy back taxes
Do shareholders prefer consideration net off buy back taxes?
Given an option, shareholders may not like receiving consideration net off buyback taxes from the company. If shareholders are paid gross consideration amount there could be a saving on amount of capital gains payable on buy back consideration received over the purchase value of shares in the secondary market. If company pays consideration net off buyback taxes, in the absence of information of purchase price of shares from the secondary market which were offered by the shareholders in buyback, they have no option but to deduct taxes on the difference between the issue price of the shares and the consideration paid for buyback which results in paying higher amount of taxes.
Shifting of tax liability on the shareholders will be welcomed by those shareholders who do not offer their shares in the buyback offer. Currently, the company is paying buyback tax and tax burden on the company will spread over equally on all shareholders including those who decide not to offer their shares in the buyback scheme.
Brief details about SimplyBuyback:
SimplyBuyback provides comprehensive advisory and compliance support for the buyback of shares under the Companies Act, 2013, Foreign Exchange Management Act (FEMA), and Income Tax Act for buy-back transactions. Our assignment encompasses understanding the objective, advising on the eligibility criteria and audit requirements, arriving at the extent of shares that can be bought back, available sources of buyback, pre-requisite actions and compliances under the Companies Act and FEMA.
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