Buyback issuances fall 95% in 2025 as government ends tax arbitrage

In the Financial Bill for FY24-25, the central government abolished Buyback Distribution Tax(BDT).

Share buybacks have lost their sheen after tweaks in the tax regime, effective October 1,2024, shifted the burden from companies to shareholders. Issuances have fallen 95 percent in 2025, with just eight such offers worth Rs 916 crore, floated so far.

Listed companies bought back shares worth Rs 1 lakh crore during 2022-24, data compiled from Prime Database shows. In 2024, there were 48 buybacks worth Rs 13,539 crore, while in 2023, 48 listed companies bought back shares worth Rs 48,452 crore, data shows. In 2022, shares worth Rs 38,735 crore were bought back.

"With the new tax regime for buybacks introduced with effect from 1st October 2024, buyback of shares has become less attractive to shareholders. Earlier, there was a tax arbitrage, which has now been plugged," said Amit Singhania, founder, Areete Law Offices.

In the financial bill for FY25, the government abolished Buyback Distribution Tax (BDT). Before October 2024, when the new regime kicked in, companies were required to pay BDT of 23 percent (20 percent tax plus 3 percent surcharge) on all the shares bought back. Shareholders received proceeds of buyback after company subtracted BDT.

Under the new rules, the company pays the complete buyback amount to the investor. These buyback proceeds are added to the shareholder's income and taxed in accordance with their income tax slab rate, which can be 35.88 percent for those in the highest bracket.

This means for any promoter or shareholder who is in the 30 percent and above tax bracket, buybacks offer little incentives. Instead of participating in a buyback, if the shareholder sells their shares in open market, the capital gains applicable is 10-15 percent.

Recently, tech behemoth Infosys announced a Rs 18,000-crore share buyback. However, high-profile promoters such as Narayana Murthy and Nandan Nilekani may not participate in the offer, according to media reports. The reports also suggested other wealthy investors are also expected to skip the buyback due to the higher tax burden. This projected lack of participation from major shareholders may imply that small and retail investors are likely to receive a significantly larger share of the buyback offer.

Market participants say the overall weakness in the Indian IT industry is also contributing to fewer buybacks.

IT industry has been hit by numerous challenges including rise of artificial intelligence(AI), global uncertainty and increasing employee costs. All major Indian IT companies have significantly underperformed benchmark Sensex this year.

In the year, TCS and Infosys shares have lost 25 percent each. HCL is down 20 percent and Tech Mahindra 15 percent. The benchmark Sensex has risen 7.8 percent, so far, data shows.

"In the last few years, the buyback landscape has witnessed a significant change. Until last year, companies used to prefer buybacks over dividends as means of rewarding shareholders due to the tax arbitrage but the government fixed the anomaly w.e.f. October 2024. In tax terms, buybacks are no longer attractive either for investors or promoter groups," said Pranav Haldea, managing director, Prime Database.

Buyback route was also used in PSUs to achieve divestment, a trend which has stopped now.  IT companies, which have historically been the largest buyback issuers, have also slowed down the offers, he said.

Buybacks are generally seen in a bear market and in the last year, while markets have remained muted, they did not enter bear market phase. All these factors have contributed to the decline in number of buyback offers, Haldea added.