It's Buyback Time

Companies are eyeing buybacks to enhance shareholder value, save tax and deploy surplus cash

Illustration: Kishore Das

When Wipro announced its buyback, analysts immediately pinned it on the new dividend tax. Announced in the Budget, companies now have to pay 10% additional tax on dividends above Rs.10 lakh besides the 20% distribution tax. For a company like Wipro, where promoters hold 73.4% stake, this tax has compounded matters. Considering last year’s dividend of Rs.2,945.5 crore, the company might have to pay Rs.172.7 crore on top of the Rs.592.4 crore paid last year. A buyback though can save it close to Rs.765 crore besides enhancing shareholder value. By reducing the number of outstanding shares, Wipro can not only log better earnings per share, it can also increase book value per share and possibly net a higher valuation. Even if it chooses not to cut the dividend, a buyback will help it distribute the Rs.21,000 cash on the books (50% of total assets) in a tax-efficient manner.