Latest Expert Exchange Queries

GST Demo Service software link:
Username: demouser Password: demopass
Get your inventory and invoicing software GST Ready from Binarysoft
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Popular Search: TDS :: VAT RATES :: list of goods taxed at 4% :: ACCOUNTING STANDARDS :: articles on VAT and GST in India :: ACCOUNTING STANDARD :: TAX RATES - GOODS TAXABLE @ 4% :: VAT Audit :: form 3cd :: Central Excise rule to resale the machines to a new company :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: empanelment :: due date for vat payment
« News Headlines »
 How to save income tax? Here are 6 investments with tax free income
 10 Top salary deductions that can save tax for you
 What are the tax saving options beyond Section 80C?
 The penalties for not paying tax on time
 How to make your salary tax efficient
 I-T Department may go into overdrive this quarter
 Ways to reduce the TDS deduction from your salary
 4 Tips for choosing who prepares your 2017 Tax Returns
 Processing of income-tax returns under section 143(1) of the Income-tax Act which were filed in Forms ITR-1 to 6 & applicability of section 143(1)(a)(vi)
 Price Waterhouse gets 2-year ban in Satyam case
 How to save income tax under section 80C

An irrational exemption
September, 08th 2007

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.

Between buybacks

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.)

Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Sitemap

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions