Skip to main content

As buyback gets taxing, IT companies may switch to dividends

Govt looks to plug a loophole in buybacks as these are not taxed like dividend payouts. 

Cash-rich Indian IT services companies may now offer more dividends to return cash to shareholders, against the recent norm of share buybacks that have become less attractive with the budget proposing to introduce a new tax.  “Buyback is the most efficient way to return capital in India because it was not taxed earlier. It also helps companies improve the value when they think the market is not fairly pricing the stock,” said V Balakrishnan, a former finance chief of InfosysNSE 0.27 %. “Suddenly you tax buyback, companies will shift to dividend because buyback comes with its own hassles.”Share buybacks by listed companies aren’t taxed currently, but there is a 15% tax on dividend payment. To discourage companies from using this loophole, the budget has proposed a 20% tax on the money spent on share buybacks. Technology services companies have been rewarding shareholders by buying back shares and issuing dividends. Top companies such as Tata Consultancy Services, Infosys, HCL TechnologiesNSE 1.93 % and WiproNSE -0.79 % returned more than Rs 40,725 crore to stockholders through sh .. 

Infosys has a stated strategy of returning 70% of free cash flow to shareholders, while TCSNSE 0.18 % returns most of the cash flow to its shareholders. The most aggressive in using the buyback route in recent years has been Wipro, as it repurchased 14% of shares with three buybacks done over the past four years.  Equity analysts said the proposed tax would impact the stock performance of these companies over the next few days. “With the new buyback tax, the government would gain Rs 8,145 crore (based on last fiscal year’s total buyback of Rs 40,725 crore in the IT sector),” Madhu Babu, an IT analyst at Centrum, wrote in a note to clients. “Select midcaps like Persistent Systems, Cyient (and) Mphasis which could have been companies with potential regular buybacks stand impacted sentimentally.”  The brokerage also expects higher negative sentimental impact on Wipro. It was understood that such a proposal to tax distribution of capital through buyback would come sooner or later, said Kuldeep Koul, lead analyst (IT services), at ICICI Securities. “Companies may still go for a buyback, the impact will be on effective return. But between a dividend and a buyback, buyback will still be beneficial,” Koul said.  Brokerage firm Prabhudas Lilladher wrote in a note it would retain its “underweight” stand on IT, citing the impact of the proposed tax on buyback of shares 
 
The Economic Times, 8th July 2019. 

Comments

Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…