That there is surplus cash sloshing around idly and that the company is over-capitalised with the excess capital pulling down the earnings per share (EPS) are the normal twin justifications for a buyback proposal. Hindustan Unilever Ltds (HULs) July 29, 2007, announcement is of a piece with the same leitmotif.
The hidden message
The unsaid but nevertheless subliminal messages the discerning observers do not miss out however are: The company has no immediate plans of expansion or diversification and the surreptitious hand of help being extended to the promoters to beef up their control in the company. With 51.42 per cent holdings, Unilever, HULs UK parent, stands to gain by 17.14 percentage points should the exercise result in a 25 per cent buyback as planned 51.42 divided by 75 and multiplied by 100, vests Unilever with a 68.56 per cent stake in the company.
For good measure, SEBI (Securities and Exchange Board of India) buyback regulations aid this by prohibiting directors and promoters from participating in the buyback exercise. Perhaps, this is one prohibition that promoters do not resent at all as it enables them to tighten their grip on the company without spending a single rupee from their pockets. Be that as it may.
Section 2(22) of the Income-tax Act curiously and irrationally bails out the payments made to the shareholders towards buyback of shares from them from the purview of the definition of dividend resulting, more importantly, in exemption from dividend distribution tax (DDT) as well.
Control for a song
HUL has earmarked a hefty Rs 630 crore for buyback. Had the same been earmarked for the upfront cash dividend, the pie would have been shared by the exchequer and the shareholders. To be more precise the shareholders would have got a dividend of Rs 538.46 crore and the exchequer Rs 91.54 crore, being 17 per cent (the approximate effective rate of DDT) of the dividend to shareholders. And out of Rs 538.46 crore, Unilever would have got Rs 276.88 crore as its share of dividend. That it has not got it is not at all going to give it sleepless nights. For, now it has got a prized catch instead a hefty 17.14 per cent percentage points additional control in the company for a song.
The law instead of coming down on sleight of hand, alas, does exactly the reverse SEBI buyback regulations countenance it and the tax law tops it up with a wholly unmerited exemption from DDT.
One can empathise if a tax subsidy is given for a worthy cause like setting up of an industry in a backward area with its multiple economic spin-offs. But pray what does buyback give to the nation? The company buying back the share has nothing to show not even the share certificates that it has bought back because they are meant to be cancelled immediately in accordance with the Indian law which mercifully does not countenance buyback for treasury operations as in the US.
Buyback from the market incidentally is worse than a proportionate buyback because the latter at least gives everyone, save the promoters and directors, a proportionate chance to partake of the largesse that consists in the premium paid vis--vis the market price on buyback. That is why the tax sop to buyback from market rankles.
S. Murlidharan (The author is a Delhi-based chartered accountant.)