Great observation – and correct for nearly all buybacks in the recent past and at an overwhelming premium. Quite the opposite of what a buy-back stands for. ( Current Buyback Offers (Tender and Open Market) 2022 )
The answer is that buy-backs in India today are done today not for buying shares cheap for the remaining shares / shareholders; but to take profits out of the company in the most tax efficient manner among all options available. Typically profits are distributed as dividends for shareholders (the original concept of buying ownership into a company to get a slice of its profits). Over time these dividends have been taxed at increasing rates. Today they are taxed at the marginal rate. This led companies to look at more efficient ways to distributing profits, and buy-back came in handy. So companies were increasingly resorting to buybacks in-lieu of dividends. That needed to be plugged.
The plugging was done by resorting to a buyback tax. This tax is to be paid whenever company buys back its shares from a shareholder. Oddly, the tax does not have to be paid by the selling shareholder who is gaining from the buyback. He sells his shares and need not pay any tax on the money he gets.The tax is paid by the company buying back the shares! That tax at about 20% (this is a simplification but broadly yes).
So, even as buyback was being taxed to stem the more tax efficient outflow to shareholders, it still remained a better option compared to dividends. However the tax, even while lower, was being paid by the company – which means the remaining shareholders!!!
So we have a Dilbertian like situation where the tax on the sale of shares by selling shareholders was paid by the remaining (or purchasing) shareholders.
This makes a buyback attractive for exactly the opposite reason the buyback stood for; it is now attractive to the selling shareholders who have an option to sell it tax free at the highest possible price!! Now who decides the price? It is often the Promoter who is also the controlling shareholder. Even if the Promoter is not, it is by someone running it who is beholden to the Promoter. A classic example is Infosys.
So, voila, you now have a situation that is exactly as you observed – buybacks are done at a higher price, so that more tax free profits may be distributed.
That tax burden is now borne by the remaining shareholders; this, in addition to buying shares in excess of fair value. A BIG double whammy.
It’s comic if you are an observer and tragic if you are a participant!!
P.S: No investments
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