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New tax on dividend triggers buyback offers
April, 27th 2016

Buybacks are going to be in vogue in 2016 after the Centre slapped a 10 per cent tax on investors earning dividends above ?10 lakh.

After Wipro recently announced a ?2,500-crore buyback, Bharti Airtel, at its upcoming board meeting on Wednesday, is set to consider a buyback.

On Tuesday, the board of Bharti Infratel, the telecom tower arm of Bharti Airtel, approved a ?2,000-crore buyback plan.

G Chokkalingam, Founder, Equinomics Research and Advisory, expects buyback to gain momentum in 2016 as the additional burden of 10 per cent is much more than the 2.5 per cent hike in Dividend Distribution Tax (DDT) in 2007 and introduction of DDT in 2002. Kunj Bansal, ED & CIO — Equity, Centrum Wealth Management, echoes a similar view. “Till the recent Budget, outflows happened from the company and not promoters due to introduction of DDT or even a hike in the same.”

However, he sees that buybacks would happen only in companies with high promoter stakes (say 65-75 per cent) to get maximum output and in cases where the quantum of buyback amounts to substantial share in the total equity.

Fair value factor

Against this, Pankaj Sharma, Head — Research, Equirus Securities, has a contrarian view. “2016 will be definitely a phase of much lower dividend payments by companies but there is no direct correlation between dividend tax and buyback as the ultimate underlying factor is fair value perceived by the promoters and profitability situation of India Inc,” he said.

According to Prime Database, six companies, including Just Dial that have completed buybacks worth ?544 crore in 2016 and buybacks by five companies, including Dr Reddy’s Laboratories worth ?1,676 crore, is ongoing. The total amount of buybacks (announced before the Budget) worth ?2,220 crore till now has already crossed the buybacks in 2015 of ?1,300 crore.

Tax, not the sole reason

However, buybacks are not the result of only the new tax norms introduced by the government or the broader market movement as market mayhem also led to a surge in buyback activity, according to data provided by Prime Database.

For example, buyback activity in terms of amount grew seven-fold in 2006 even as Nifty gained 40 per cent. Hike in dividend distribution tax to 15 per cent from 12.5 per cent in 2007 led to the total buyback amount for the year rising by 49.5 per cent compared to 2006. The benchmark index, Nifty 50 ended up 53 per cent in 2007.

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