Two valid issues seem to be confronting the huge buybacks that investors have taken a fancy to as companies opt for this route as the preferred way of utilising their huge unutilised cash reserves.
Securities and Exchange Board of India (Sebi) chief Ajay Tyagi has rightly raised the red flag on a rising number of buybacks that have overtaken the quantum of funds mobilised through initial public offers by companies in India.
Companies including bellwethers like Infosys and Wipro have returned a huge Rs 33,495 crore through 21 buyback offers. This is more than 2.3 times the kind of capital mobilisation made by companies via IPOs till date in this financial year. If all buybacks happen, the funds to be returned this entire fiscal would be a whopping Rs 50,000 crore. Similarly, the funds returned to investors through repurchase of shares in 49 buyback offers in 2016-17 was a massive Rs 33,931crore as against Rs 28,225 crore mobilised by companies via 25 initial public offers.
On a long-term matrix, buybacks have caught up in a major way with IPOs sending out ominous signals in the market. Since 2010-11, investors have received cash payments worth
Rs 75,415 crore till date via such buybacks while the companies’ mobilised funds worth Rs 101,686 crore in the same period.
Legendary investor Warren Buffet has been a big votary of buybacks that crossed a whopping
$500 billion in US alone annually. Most market players like Buffet have backed buybacks as the surest form of providing cash benefits to the loyal and long-term investors in case a particular company was flush with idle funds and has the capacity to borrow, if required.
Second mandatory condition for buyback prescribed by global investors like Buffet was the selling of stock in the open market below its intrinsic value. While most Indian companies that made buyback offers to use their huge cash reserves, they conveniently ignored the fact that their stock price was much above the intrinsic value they should have commanded.
People like Ajay Tyagi rightly feel that these buybacks would not benefit investors over the long term. And, definitely, it indicates tentativeness on the part of a company’s investment plans in both the short and long term. Even the sector’s prospects may have looked gloomy to make a buyback offer. In this regard, the best example was Hewlett Packard that invested $47 billion in stock buybacks over the last decade and the stock’s value is nearly half today. One would agree that the best way to provide value to investors was genuine earnings by a company through business operations, profits and not buybacks. Use the cash reserves for acquisitions which have a strategic fit or for capital expenditure to build a brick and mortar asset or a new business vertical. Of course for an it services company only the first route is available and as we have now seen in the $200 million acquisition of Israeli company, the buy out raised a stink. In the Indian context, buybacks may lose their sheen given that the government proposes to take away tax exemptions on such funds received by investors. If income tax department has its way, funds received through buybacks by investors may be treated as capital gains and taxed.
Whether buybacks were the surest way to deploy cash by companies was a different question to be settled by all stakeholders. But, government has no business to tax any money received by shareholders on buybacks by treating such funds as capital gains.
At a time when securities transaction tax (STT) was seen as a burden on genuine small investors, bringing in yet another tax on buybacks is deplorable. This may weaken the sentiment at a time when market buoyancy was very much necessary to keep India attractive as an investment destination.
Government’s move to amend section 46(a) and 48 to treat buyback payments as capital gains in the hands of investors is regressive and unsustainable. Stock transactions — buying and sale of equities as well as buyback payments — should not be seen as a lucrative avenue for mobilising tax revenues. Unfortunately, the fetish for unearthing black money has acted as a catalyst for tax terrorism, the government’s third amnesty
Scheme proving to be another colossal failure with just Rs 4,900 crore being raised.