Share buybacks: DIPAM's buyback could be affected by tax, but will still be undertaken, says secretary

The recent Budget announcement of a 20 per cent tax on share buybacks could marginally affect the equity repurchase plans of the CPSEs but still it will remain an important mechanism to achieve the disinvestment target of Rs 1.05 lakh crore in fiscal 2020, a top official of the sell-off department said. "Buyback stream will be marginally affected by the tax on buyback. Nevertheless it will remain an important stream," Atanu Chakraborty, Secretary, DIPAM (The Department of Investment and Public Asset Management) told IANS in an interview. 

Asked if he foresees low number of buybacks this year due to tax, he said: "It would be presumptuous to predict that this would be only negative or there would be no impact. There is an element here, and it (the tax) may or may not affect. But there are other routes for divestment also. Buyback had become a good route for tightening up the capital structure of CPSEs.

"However, since retail investors would get affected to some extent, we will have to see how their response is. Last two years through IPOs, ETFs they have participated hugely. In ETF alone, we have seen 4 million retail investors coming into the PSU space. That`s a big number and their interests has been sustained." 

He, however, maintained the tax would not derail DIPAM`s buyback programmes.

"How do we know if there is any muted interests due to this tax or not unless we get into the action on that front (buyback)? It`s a bit of chicken-and-egg type situation. It would be presumptuous to say about this with surety," he said. 

After Finance Minister Nirmala Sitharaman proposed an additional tax of 20 per cent in case of buyback of shares by listed companies, it has forced investors and companies to rethink their strategy. 

On July 11, KPR Mill became the first company to withdraw its share buyback plan after the Budget announcement. 

The Buyback programme of Bombay Stock Exchange will attract an additional tax burden that will come to around Rs 12 crore. 

For meeting the target and the higher target of Rs 1.05 lakh crore, he said DIPAM has two major bouquets -- minority and strategic disinvesments. 

"We have a large number of comapnies lined up for minority disinvesments, a major feature of this year. The line-up is both for IPOs and for those companies which have to reach the level of minimum public shareholding (MPS) of 25 per cent. There aren`t many CPSEs under MPS category but it is a good number. 

"Then the other channel is buyback stream. Third stream is ETFs. The other tools are -- Offer for Sale and all these are part of the minority stake sale programme. There are two ETFs currently operational -- CPSE ETFs and Bharat 22 ETFs. 

Under the strategic disinvestment and merger acquitsitons or consolidation in the CPSE space, Chakraborty said: "We have resonable number of transactions already lined up, we have a pipeline ready but since our instruments are market-driven, market conditions will impact the outcome of whatever we wish to." 

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The Secretary said last fiscal about Rs 17,000 crore was garnered through buybacks which is a a sizeable chunk. "ETFs fetched Rs 45,000 crore. It is the largest amount of funds to go through ETFs and Buybacks worldover. ETFs started in 2014 and having matured show a return and now are attracting interests. 

"Subscripion was very high across all categories -- foreign, anchor, retail and we will use this instrument and we continue to look at other instruments also." 

Buyback in CPSEs are done under a guideline. The guidelines set by the Department mandate that companies worth Rs 2,000 crore, and cash and bank balance more than Rs 1,000 crore have to mandatorily buy back shares. 

The Finance Ministry prepares a tentative list of CPSEs that will conduct a share buyback during any financial year after discussing the proposal with the CPSEs or their nodal ministries.