Then there are share buybacks. Essar Oil, Reliance, Siemens and Infosys are some examples of companies that have bought back their shares.
Share buybacks also prevent dilution of earnings. In other words, a buyback enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc.
Last but not the least, a buyback also serves as a substitute for dividend payments. This brings us to the crucial issue of tax implications of a buyback. A very important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If it is indeed considered to be dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value?
In the case of Anarkali Sarabhai v CIT (1997) 90Taxman509 (SC) had laid down the principle that redemption of shares by the company which issued the shares (in this case preference shares) is tantamount to sale of shares by the shareholders to the company.
The Finance Act 1999 has reiterated this stand to remove confusion. Now, where any company purchases its own shares, then, the difference between the consideration received by the shareholder and the cost of acquisition will be deemed to be capital gains. Further, this will not be treated as dividend since the definition of dividend does not include payments made by company on purchase of its own shares.
