Dec 19, 2022

Buybacks may soon be taxable in the hands of the shareholders

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The Capital Markets Regulator, SEBI, vide its Consultation Paper dated November 16, 2022 has proposed many changes in the Buyback Regulations. Some of the proposals are relaxing in nature, while some may have stringent implications.

One of the most critical implication, from the shareholders’ perspective, may be imposition of income tax obligation on the respective shareholders. Under the extant laws, the income tax is needed to be deducted by the Listed Company and the buyback proceeds are fully exempt in the hands of the shareholders.

Key changes proposed for Open Market Buybacks (through Stock Exchange)

  • Abolition of the Open Market Buybacks, in a phased manner, by next 2 FYs.
  • During these 2 years time period, the minimum amount to be utilised is proposed to be increased from extant 50% of committed amount of Buyback to at least 75%.
  • At least 40% of Buyback size to be bought back to be utilized within half of Buyback period. Presently, there is no such provision.
  • The buy-back through stock exchanges to be undertaken only in respect of frequently traded shares. Whereas, presently, there is no such restriction on infrequently traded companies.
  • Capping of everyday, number of shares that may be bought back.

For Tender Offer Route

  • Upward revision of Buyback price
  • SEBI may no longer review the Draft Letter of Offer.
  • The Buyback limits may stand revised from the extant 25% to 40% of Paid Up capital and free Reserves.
  • More than 2 buyback offers may be allowed in one financial year, provided the Company is Net Debt free.

Streamlining of Buyback through Book Building process

Although the Buybacks through the Book Built process, has been in the Regulations for a long time now, but there are hardly any companies that have availed the same. It is proposed to streamline the same, so as to encourage the Companies to come out with Buybacks through this route.

The proposed changes if implemented will on one hand improve Tender Route Buyback prospects and on the other hand, Open Markets Buybacks may soon be a history.

Which companies should plan Buyback ?

  1. Large capital base as compared to industry peers.
  2. Rich cash reserves but no avenues/project to deploy that cash.
  3. Declining EPS of Company – the Company desirous of returning the excess cash to shareholders in order to improve the earning per share.
  4. Market Price of shares is low & promoter holding is less and there is a scope to consolidate the same, to avoid the hostile takeover.
  5. Illiquid Company’s stock and shareholders are feeling stuck in the company.
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