A recent regulatory overhaul by the Securities and Exchange Board of India (SEBI) could pave the way for the return of market buybacks, a capital allocation tool that had largely fallen out of favour due to tax and operational complexities. According to Deepak Shenoy, founder and CEO of Capitalmind Mutual Fund PMS, the changes remove several hurdles that had made market buybacks cumbersome under the previous regime.
In a detailed post on X, Shenoy argued that buybacks are often a more efficient way of returning cash to shareholders than dividends. While dividends distribute profits across the same number of shares, buybacks reduce the share count, allowing future earnings to be spread over fewer shares and potentially boosting earnings per share.
The tax treatment has also become more favourable. Dividends are taxed as income in the hands of investors, potentially attracting rates as high as 36% for some taxpayers. By contrast, gains from shares sold in the market are subject to capital gains tax rates of 12.5% for long-term holdings and 20% for short-term holdings.
Historically, companies could repurchase shares either through tender offers or market buybacks. Tender offers, often conducted at a premium to prevailing market prices, guarantee proportionate participation for shareholders but can be expensive for companies.
Market buybacks, on the other hand, allow firms to acquire shares directly from the open market. However, under the earlier tax regime, they required separate trading windows, merchant banker involvement and extensive exchange-level tracking to identify whether shares were sold to the company or another market participant.
Shenoy noted that recent tax changes have removed much of that complexity, enabling SEBI to reintroduce market buybacks in a simplified form. Companies will no longer need dedicated buyback trading windows, and merchant bankers are no longer required to execute purchases on behalf of issuers.
Under the revised framework, promoters will be barred from selling shares during the buyback period, eliminating the need for exchanges to separately track promoter participation. Companies can now execute buybacks directly through their own trading accounts.
SEBI has also introduced safeguards to ensure announced buybacks are executed. Companies must complete the programme within 66 trading days, with at least 40% of the proposed buyback completed in the first half of the period.
For companies sitting on large cash balances, he says, the changes could make market buybacks a more attractive alternative to dividends, potentially reviving a mechanism that many investors view as a more tax-efficient way of returning capital.
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