Buybacks are back! 4 factors driving Corporate India's Rs 25,000-crore buyback wave

Indian companies have announced buybacks worth nearly Rs 25,000 crore so far this year. This is the highest level of buyback activity seen in the last three years, according to Zee Business Research.

The trend is notable because companies are continuing with buybacks despite changes in tax rules that have increased the tax burden on promoters.

Data compiled by Zee Business Research shows that around 10 companies have announced buybacks in the last two months alone. The biggest buyback this year came from Wipro, which announced a Rs 15,000-crore share repurchase programme.

Why are companies buying back shares?

A buyback is a process in which a company purchases its own shares from existing shareholders. To make it attractive, companies usually offer a premium to market price to entice shareholders to participate.

Zee Business research shows that the one of the key reasons for the recent surge in buybacks is also market volatility. Companies generally announce buybacks when markets are witnessing sharp swings.

Another reason is strong cash generation.

Many companies, especially in the IT services, FMCG and industrial sectors, are holding large cash reserves. At the same time, investment opportunities remain limited.

According to Zee Business Research, several companies currently have surplus cash on their balance sheets but do not have enough projects or expansion plans to deploy that money. As a result, they are returning cash to shareholders through buybacks.

Cash-rich companies lead the trend

The companies announcing buybacks are largely those with healthy cash balances.

According to Zee Business Research, Wipro had cash reserves of Rs 42,819 crore before announcing its Rs 15,000-crore buyback. The company offered a buyback premium of 19 per cent.

Other companies that announced buybacks include:

Source: Zee Business Research

The data shows that most companies announcing buybacks have strong cash positions. The buyback premium offered by these companies ranges from 13 per cent to 20 per cent.

What does it mean for investors?

The latest buyback wave comes after changes in taxation rules.

As per the latest notification issued by the Government of India, the amount received through a buyback is treated as capital gains for shareholders.

After this rule, Buybacks have become beneficial for retail and small investors. Tax is levied on the actual gain earned by the investor and not on the entire amount received through the buyback. This is one reason why buybacks may remain attractive for retail investors.

According to Zee Business Research, the current buyback wave is being driven by four key factors: market volatility, changes in tax rules, strong cash flows in sectors such as IT services and FMCG, and surplus cash with limited investment opportunities.