Time for a relook at tax on buybacks

Globally, share buybacks are an extremely popular mechanism for companies to return capital to shareholders, rightsize their balance sheets, and signal confidence in their financial health.

- Debashis Basu

Globally, share buybacks are an extremely popular mechanism for companies to return capital to shareholders, rightsize their balance sheets, and signal confidence in their financial health. For example, Apple has done buybacks worth $430 billion over the last five years, boosting its share price. However, like every other aspect of economic activity in India, the only policy objective of the state has been to extract as much money as possible by taxing buybacks, leaving companies lukewarm to the idea and depriving shareholders in the process. This becomes immediately apparent in a bear market, when the stock prices of outstanding companies with strong cash flows are down but none of them feels impelled to launch a buyback offer. What can be done to encourage companies to buy back their shares in a move that would be beneficial for shareholders?

The legal and regulatory framework governing buybacks is primarily under the Companies Act, 2013, and the Securities and Exchange Board of India (Sebi) Buyback of Securities Regulations, introduced in 1998 and updated in 2018 and 2023. Before this, the Companies Act, 1956, did not allow companies to repurchase their own shares because it was seen as a potential misuse of corporate funds, which could harm creditors or minority shareholders. The concept gained traction globally, particularly in the United States (US), prompting India to reconsider its stance in order to align with international practices and provide companies with greater financial flexibility.