Why buybacks look good for companies but hurt investors, Deepak Shenoy breaks down

Share buybacks may boost earnings per share and make companies look leaner, but for most Indian investors, they are a losing proposition, warns Deepak Shenoy, founder of Capital Mind. “For a taxable individual, buybacks are not useful to tender in India,” Shenoy wrote in a social media post on Saturday, breaking down how the tax rules stack the odds against shareholders.

“The full amount of the buyback is taxed as dividend. Shares tendered in a buyback are assumed to be sold at zero rupees,” Shenoy said. For an investor who bought shares at Rs 1,000 and tenders them at Rs 2,000, the payout is taxed at the individual’s slab rate, which can be 35% or more.

Meanwhile, the Rs 1,000 purchase cost is treated as a capital loss. “For capital gains, long-term taxes are 12.5%, and you can only offset long-term losses against long-term gains, so it’s only a 15% benefit (after surcharges on tax) on Rs 1,000 = Rs 150 saved in taxes,” Shenoy said.

By his calculation, a tender into such a buyback leaves an investor with Rs 1,450 net of taxes. Selling the same shares in the market at Rs 1,700, by contrast, would yield Rs 1,595 after tax.

Optional, but still unattractive

Buybacks are not mandatory in India. “There’s a tender window (which can come months later), and if you don’t tender, you just don’t get your shares bought back,” Shenoy wrote. For investors who need liquidity, he argued, selling into the market usually delivers a better after-tax outcome.

Why companies still prefer them

Shenoy pointed out that the rules were not always this harsh. “Buyback tax rules have become onerous, as you’ve seen. It used to be that buybacks were not taxed in your name – the companies just paid a flat 20% tax. This changed to the new system in 2024.”

Even so, he said, “Buybacks are great for companies though.” Unlike dividends, which are also fully taxed, buybacks shrink the share base, making future earnings per share look stronger. “So it’s better for a company to do buybacks than to give dividends.”

Who wins in this system?

Not everyone loses. “Investors in lower tax slabs and some Indian institutions that don’t pay tax, like insurance companies, pension funds, EPFO and mutual funds,” stand to gain from buybacks, Shenoy said.

His advice for retail investors was blunt: “Calculate the real post-tax return on your investment before you decide to tender shares in a buyback. It’s usually better off just to sell as many shares in the market instead, unless you are in a low tax bracket.”

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