What’s in share buyback it for the retail investor?1 min read . Updated: 18 Sep 2018, 10:39 AM IST
If the buy-back price is higher than current market price, which is mostly the case, an investor could do well to participate in it
Mumbai: A company can buyback shares either through the tender offer route or through open market purchases. In case of a tender offer route, if the buy-back price is higher than current market price, which is mostly the case, an investor could do well to participate in it. Unless only a small number of shares from his total shareholding will be accepted. Even if he wishes to maintain his holding in the company, he can always buy the same number of shares that were accepted in the tender, at a later date from the open market, if the price drops. Of course, there is no surety on price movement.
In the other route, a company buys back shares through open market purchases. In this method, it communicates the maximum price, duration of buyback and the amount of money it intends to spend on buyback. The investor then sells shares in the open market during the stipulated period at the open market price. In this case, there is uncertainty about the number of shares and actual value that will finally be accepted.
In the Indian context and especially after the government introduced the recent dividend distribution tax, buybacks are more tax efficient when compared to dividends. Companies are taxed thrice in case of dividend payouts. First, it pays indirect taxes; second, it pays 15% dividend distribution tax on gross amount of dividend paid. Third, the company pays tax on profits too. Buybacks circumvent the dividend distribution tax. Further, a large investor who earns a dividend greater than ₹ 10 lakh will be slapped with 10% tax on dividend income.
In the case of buybacks, shareholders who are invested in the stock for more than 12 months need to pay long term capital gains tax at 10%. However, those invested for less than 12 months, need to pay short term capital gains at 15%. Besides, the firm doesn’t incur the dividend distribution tax, which eats into the dividends received by the shareholder.