In a year when the stock markets have hit new highs — the Sensex has put on 17% between January and now — companies are spending large amount of cash to buy back their shares. The buybacks are helping boost the firms’ earnings per share (EPS) at a time when corporate profits are growing slowly. The Sensex at current levels of 31,138 points trades at a price-earnings multiple of over 18 times one-year estimated forward earnings, a 20% premium to the long-term average multiple. With the Rs16,000-crore buyback of Tata Consultancy Services (TCS) shares complete, companies have now bought back nearly Rs30,000 crore worth of shares since January. This is more the Rs27,000 crore worth of buybacks done in 2016. TCS’ buyback has been the biggest share repurchase offer so far this year. In 2012, Reliance Industries bought back shares for an amount of Rs10, 440 crore. Buybacks appear to have become the preferred route for companies to return wealth to shareholders, especially since dividend income of over Rs10 lakh per annum is taxable at 10% in the hands of all residents, domestic companies, trusts or funds except those established for religious, educational or charitable purposes.
The government is also using the buyback route to tap the coffers of cash-rich PSUs; it hopes to be able to meet its divestment target this way. Of the Rs46,246.58 crore raised by the government through the disinvestment route in 2016-17, nearly Rs 19,000 crore came through state undertakings buying back their shares. Buybacks are the process by which companies repurchase their shares from stakeholders. The bought-back shares are extinguished, shrinking the firm’s equity base. TCS’ offer came a week after US-based software services player Cognizant Technology Solutions, which has centres in India, announced plans to buy back shares worth $3.4 billion.
NHPC, the state-owned hydropower producer, bought back shares worth Rs 2,616 crore. NLC, another state-owned company that is engaged in the mining of lignite and generation of power through lignite-based thermal power plants, bought back shares worth Rs 1,476.49 crore. Among other private sector companies, Mphasis bought back shares worth Rs 1,103 crore. Vardhman Textiles bought back shares worth Rs 719 crore. KPR Mills, Hexaware Technologies and Balrampur Chini were among the other private sector companies that completed their buybacks in past six months.