Sebi doesn’t want Peter to pay Paul’s tax in buybacks

Representative Image: Reuters

Calling the current taxation rules problematic with respect to buyback of shares by companies, the Securities and Exchange Board of India (Sebi) said it is working with the finance ministry to address the issue.

“Consultation paper spoke of tax constraints. Our current regulations are not fair. Right now Peter pays for Paul’s tax. So that is not a very good idea,” said Sebi chief Madhabi Puri Buch at a press meet on December 20.

Currently, buybacks of shares are allowed under two routes: tender route and open market route. In the first instance, the company invites shareholders to sell the shares to it at a fixed price for a fixed period of time when the tender is open. In this case, not all shareholders may want to sell their holdings back to the company. However, present rules mandate that the company that offers to buy back its shares shoulders the tax liability which eats into the value of shareholders choosing not to tender the shares. Essentially, shareholders cough up taxes for not participating in a transaction. Buch explained that the regulator’s rules and relaxations required under the Company’s act will be done simultaneously to address this issue.

Sebi has proposed to phase out the stock exchange route for buybacks. The timeline for completion of buyback has been now reduced by 18 days. The regulator has proposed that this period will be reduced to 66 days in 2023 and further to 22 working days in 2024. The route will be completely extinguished by 2025. Companies have to now use 75 percent of the proceeds of the buyback undertaken through the stock exchange route from the existing minimum of 50 percent. Buybacks will be undertaken through a separate window on stock exchanges till the time they are permitted through the exchanges, the regulator said.

The changes were part of a bunch of recommendations by a panel formed earlier this year under the chairmanship of Keki Mistry, vice chairman of HDFC Ltd. The panel has also recommended a reduction in the maximum limit for buybacks, a cut in time taken for concluding buybacks in the open market and an increase in the utilisation of proceeds of buybacks to 75 percent from the current 50 percent.