TCS, Wipro, Infosys and peers may have to review share buyback plan as the new budget may take a bite out of it

(Left to right): Infosys, Wipro and TCS may fall 4-8% with the Union Budget 2019 announcing a 20% tax on buyback shares and increasing the minium public shareholding to 35%Business Insider India

  • The Union Budget announced a 20% tax on buyback shares last week and IT companies are already feeling the pressure.
  • The Budget also proposed increasing public shareholding limits in a company to 35%, which means promoters of companies will have to dilute their shareholding.
  • The new changes will particularly impact Wipro and Infosys since payout yields, rather than earnings, was the primary determinant for investors.
What was shaping up to be a year of buybacks might be for naught with Union Budget 2019 announcing a 20% dividend distribution tax on buyback shares with immediate effect.

Dampening the markets further, Nirmala Sitharaman also announced a proposal to increase the minimum public shareholding limits in a company from the current 25% to 35%


Both, the buyback tax and increase in public shareholding, might lead to a 4-8% fall in the yield of IT stocks, according to Dart Research. Infosys and Wipro, in particular, will bear the impact since payout yields, rather than company earnings, was one of the primary determinants for investors.

The announcement of a 20% tax on buybacks goes further than just eliminating the tax arbitrage with dividend payout – it spells the end of the buyback option altogether for corporates.

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The combination of both those factors is one of the major reasons behind the biggest Sensex crash in three years — and IT companies are bearing the brunt.


The buyback plan

IT giants, Infosys and Wipro, whose buyback offers were open at the time of the budget, saw their stocks drop with the announcement of a 20% tax on the buyback of shares.

Infosys and other IT giants — like TCS, Infosys, HCL Tech, and Tech Mahindra — have been using buybacks to payout shareholders because paying out dividends attracts a tax of 20.56%.

For the past three years, these companies have been using a mix of both dividend payouts and share buybacks to distribute cash to their shareholders.

Infosys announced a ₹8,260 buyback offer in January. Soon after, Wipro announced its buyback offer in April this year, which is the third of its kind in the past four years.

Cumulatively in the past two years, Wipro has used buybacks to make 90% of its shareholder payouts. TCS, on the other hand, made 60% payouts using buybacks.