The rise in share buybacks in India

Business Standard reports that Infosys has announced a share buyback of Rs 9200 Cr.

The company board approved share buyback programme worth up to Rs 9,200 crore priced at Rs 1,750 per share, a premium of 25.12 per cent over the stock's closing price on the BSE, of Rs 1,398.60 per share, as on Tuesday.

It also has another article pointing to the rise in share buybacks in corporate India. 

The article argues that the recent changes in taxation has prompted this rise. From April 1, 2020, dividends in the hands of shareholders were brought under the tax net and that too at the marginal tax rate, and dividend distribution tax on the company was removed. Further, capital gains on buyback are taxed at 20%. The arbitrage opportunity is clear and irresistible.  

“Dividends impact promoters and significant shareholders with an additional tax burden of 20-30 per cent over a buy back. No reason why shareholders would want to bear that burden, especially companies with large promoter or investor shareholding,” said Praveen Raju, Partner, Spice Route Legal.

I am not sure why such regulatory arbitrage should be allowed. 

Shareholders are by definition putting forth risk capital. Technically, for them, it should not make any difference as to how they realise returns - either as dividends or buybacks. Both are realised returns on their investment. I don't know a reason why one form should get a preference over the other in taxation in the hands of shareholders.

Of course, for a company, there are important implications on which route they take to share gains with shareholders. And the corporate tax treatment should take that into account. 

The rise of buybacks also raises an intriguing point. On the one hand, corporate India has done well to emerge out of Covid in good health (though the outbreak of the second round raises questions). It's well placed to invest and grow. But, on the other hand, this rise in buybacks among the biggest companies points to less confidence on economic prospects. Buybacks are after all displacement of capital from investments. 

Much has been written on the corrosive effects of share buybacks in the US, including in The Rise of Finance.