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Buybacks by public companies attract taxes

Author: Krishnadas Saiju, final year student at the National University of Advanced Legal Studies, Kochi


The Finance Ministry in the Union Budget projected the levying of taxes for buy-back of shares by listed companies. Section 68 of the Companies Act, 2013 authorities a company, both private and public, to buy back its shares or other specified securities in accordance with the preconditions prescribed under Section 68 and the Companies (Share Capital and Debentures) Rules, 2014. Further, listed companies are permitted to buy back its securities in accordance with the conditions prescribed by the Securities and Exchange Board of India (SEBI) (Buy-back of Securities) Regulations, 1998 and the relevant sections of the Companies Act. The company is permitted to buy back its shares or other specified securities (collectively, the Securities) from firstly, free reserves, secondly, securities premium account or thirdly, from proceeds of the issue of any Securities. However, no buyback of any kind of securities shall be made out of the proceeds of an earlier issue of the same kind of securities. A listed company may buy back the Securities from firstly, the existing security holders on a proportionate basis, secondly, from the open market either through the book-building process or stock exchange and thirdly, from odd-lot holders.  

The outcome of levying 20% on buy-back of shares by Companies would dismay and deject companies from buying back shares and shall endorse distribution of profits in the form of dividends to shareholders. Buyback of shares is a mechanism used by promoters against hostile takeovers by hiking their stake in the company. This route was more exploited after the Financial Year 16-17 as dividends crossing 10 lac/- were taxable on shareholders accruing them. Even after the induction of long term capital gains of 10% for an amount greater than 1 lac in a financial year, buyback was still the preferred option. Buybacks may be done through two methods namely, tender route and open market purchases. The former entails of fixing the buyback price and accepts share on a proportionate basis. The acceptance ratio plays a crucial role in determining the holdings that can be sold. One may not fully be able to participate in a buyback and hence dividend payout is a better deal for investors. This move shall increase the returns on investment thus encouraging investment by the public. This helps long term investors in particular and encourages such types of investment.

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