The buyback is a form of borrowing money by selling the bonds or shares in which the company signs an agreement stating that they will repurchase them later. The companies try to encourage the shareholders and the promoters by selecting the buyback method over the dividend payouts. Because the Finance department in the recent Union Financial budget proposed an increase of ten percent tax on taxpayer’s dividend income is more than ten lakh in the financial year, which is inclusive of the twenty percent in the dividend distribution tax. And the dividend income is the income earned by the shareholders and the promoters.
Many entities focus on the buyback method because it is exempt from the tax. The Parma Company Dr.Reddy’s Laboratory chose the buyback method for the financial year 2016-2017. The technology firm Wipro also opted for the buyback payout and announced two thousand five hundred crore buybacks of one rupee per share against its previous year’s share in the year 2015-16. And the telecom company Bharati Infratel and Bharati Airtel on April 23rd, 2016 said that they will decide with their board members to decide whether to select the buyback or dividend plan.
Executive Director of Khaitan and Co, Sudhir Bassi said that many firms will select the buyback method, but at the same time they will not withdraw from the dividend payout. Because the shareholders and the promoters have many holdings and if a promoter does not participate in the buyback, while the share holder participates will dilute the holdings of the promoter. So when the promoter’s holdings are stable, the buybacks will work. And according the norms, the firm has to maintain 6 months of cooling period after buyback, so the entity cannot rain revenue from equity shares.