Mumbai: Share buybacks in 2017 nearly doubled from the previous year to a record Rs55,236 crore, data shows. At a time of strong rally in equities, companies were exhausting their cash reserve to reduce share count through stock buybacks.

In a year that saw benchmark equity indices rise 27-28%, 50 companies bought back shares worth Rs55,236 crore, compared with 37 firms having bought back shares worth Rs27,887.44 crore in the previous year, according to data from Prime Database.

The two years before that—2014 and 2015—saw just 16 and 13 companies repurchasing shares worth Rs2,019.28 crore and Rs1,263.15 crore, respectively. 

Divestments by the government and lack of investment avenues prompted companies to turn to buybacks, analysts said. “Divestment by the government has contributed to it. Secondly, with the dividend distribution tax (DDT), buybacks were used by promoters to increase their stake in the company in a more tax efficient manner. These are the two major reasons for such high number of buybacks last year," said Pranav Haldea, managing director, Prime Database. 

Companies are required to pay DDT of 15% of the aggregate dividend declared, distributed or paid.

“Buybacks are undertaken by companies that do not have any immediate need for cash. They want to distribute cash amongst the shareholders and find buybacks a tax-efficient way to do so as compared to dividends. PSU companies also undertake buybacks to meet the revenue needs of the government. Last year, we saw a lot of PSUs and IT firms undertaking buybacks," said Deepak Jasani, head (retail research) at HDFC Securities Ltd. 

IT companies led the year’s buybacks, with 11 of them accounting for nearly Rs45,295.75 crore. Some of the largest were from Wipro Ltd, Infosys Ltd and Tata Consultancy Services Ltd, which repurchased shares worth Rs11,000 crore, Rs13,000 crore and Rs15,999.99 crore, respectively. 

“It was a sectoral trend as companies were sitting on idle cash and not deploying it anywhere; so, there was pressure by shareholders to return that money," added Haldea. 

While the Nifty jumped 28% in 2017, the BSE IT index rose a mere 11%, as technology companies struggled with weak earnings, pricing problems, H-1B visa woes and company-specific issues. Buybacks and dividends are usually seen as key drivers for stock price movement. However, their effectiveness to bump up share prices seem to be fading. Except Infosys, Wipro and HCL Technologies, shares of IT companies fell after a month of closing the buybacks. 

Analysts said the urgency to boost share price by returning money to investors imply Indian firms either did not have too many avenues to deploy cash or lacked confidence in the business climate as these firms were not investing on equipment, facilities or hiring. According to Haldea, that the companies could not find suitable avenues to use that money for expansion, diversification or acquisition is a matter of concern.

Jasani said currently, capacity utilization in the Indian industrial sector is 71%, and until this rises to 80-85%, additional capex deployment will be limited. He expects the trend to continue this year as well, provided taxation norms do not change, as there may still be other companies facing similar dilemma. “Further, in case US-based MNC companies want to repatriate accumulated profits under the new tax code proposed by Trump administration, they could also look at buybacks to distribute cash among the shareholders," he added.

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