KPR Mill Cancels  Buyback After Tax Imposed In Budget 2019
Rolls of coloured yarn sit on hangars at a knitting centre (Photographer: Lisi Niesner/Bloomberg)

KPR Mill Cancels Buyback After Tax Imposed In Budget 2019

KPR Mill Ltd. became the first company to cancel its buyback plan after Budget 2019 imposed a tax on repurchase of shares.

The increase in the amount of buyback obligation due to the tax proposal in the budget was neither contemplated nor prevailing at the time of the consideration and the approvals of the board and shareholders, the apparel maker said in an exchange filing.

We are not permitted to meet the buyback obligations beyond the amount approved by the board of directors and shareholders of the company and the same can also be effected only with the borrowed funds, which is prohibited by law.
KPR Mill’s Exchange Filing

In June, KPR Mill had announced its proposal to repurchase up to 37.50 lakh fully paid-up equity shares of Rs 51 each at a price of Rs 702 per share, for a consideration not exceeding Rs 263.3 crore.

The budget proposed a tax of 20 percent plus surcharge and cess on buyback of listed shares, totaling 23.3 percent. Prior to this, only dividend payments by companies were taxed at 15 percent plus the applicable surcharge and cess.

Also read: Budget 2019: The Impact Of Surcharge And Buyback Tax On Equity Investors

According to the previous tax implication on dividend payments, if the dividend revenue in the hands of the shareholder exceeds Rs 10 lakh, it was further subject to a 10 percent tax plus surcharge and cess. But the new proposal in the budget spares the shareholder from paying further tax.

Calling the new buyback tax a disincentive, Kotak Securities said the amendment in buyback tax leads to taxation of at least 20 percent on payout to shareholders.

This tax is effectively an alternative form of income tax.
Kotak Securities

The tax now levied on share buybacks will effectively bring taxation on buybacks on par with dividends, said Neelkanth Mishra, chief India strategist at Credit Suisse.

Prior to the increase in such a tax, listed companies doing buybacks did not have to pay any tax and preferred it over dividends for distributing cashback to shareholders.

“Indian IT companies did some large buybacks over the last two years taking advantage of this loophole but with this new levy, buybacks become less attractive and the quantum may come down,” Mishra said.

More than 70 companies announced or completed Rs 35,460 crore of share buybacks in the first half of 2019, data compiled by Bloomberg show. That’s about two thirds of the Rs 54,600 crore of such transactions for all of 2018, which was the most in at least six years, the data show.

Software giant Infosys Ltd. is one of the companies which has its buyback queued up this quarter. Other companies which have lined up share buybacks or are in the process of a buyback include:

  • Orbit Exports
  • Aurionpro Solutions
  • Action Construction Equipment
  • Nava Bharat Ventures
  • Great Eastern Shipping
  • SH Kelkar
BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.