KARACHI: WhatsApp groups are swarming with speculation about the possibility of a share buyback tax — an increasingly popular practice that allows listed companies to buy their own shares on the stock exchange to improve their market value.
Companies that have recently made share buybacks or are currently in the process of exercising include Netsol Technologies Ltd, Maple Leaf Cement Factory Ltd, Lucky Cement Ltd and JDW Sugar Mills Ltd.
Large corporations in developed economies have stepped up share buybacks in recent years, thanks to excess cash on their balance sheets. Exercise results in higher earnings per share as their total number of shares decreases and breakout values improve.
Companies buy back their shares to cancel them outright or hold them as treasury stock, which effectively reduces their free float or exchange-tradable shareholding.
The sustained increase in stock buybacks in the United States recently prompted the Biden administration to impose a 1% excise tax through the Inflation Reduction Act. Canada followed suit in the outgoing week, with Prime Minister Justin Trudeau’s government announcing a 2% tax on companies buying back their shares on the stock exchange.
Should the government also tax share buybacks on the Pakistan Stock Exchange?
After all, companies burn their “distributable profits” to make such transactions. The same accumulated cash would otherwise be used for the payment of dividends or the expansion of the business.
In the process, the government loses the tax it would have collected on the payment of dividends in the first case or jeopardizes future economic activity in the second case.
Speaking to Dawn, Arif Habib Commodities Ltd CEO Ahsan Mehanti said the taxation of share buybacks is mainly a phenomenon of the developed world where markets are overheated and dividends are generally low.
“Buyouts discourage (share) price discovery, shrink volumes and reduce (the number of) shareholders in developing markets…So taxing them can increase government revenue and help markets grow,” did he declare.
AKD Securities Ltd CEO Muhammad Farid Alam told Dawn that any tax on share buybacks should be discouraged as the transaction does not involve any immediate income generation of any kind.
“These are rare transactions anyway. Valuations are already falling. A tax at this point will only hurt the small business which is finally accelerating,” he said.
According to Mohammed Sohail, CEO of Topline Securities Ltd, it is wrong to say that share buybacks do not generate taxes for the government. A buyout drives the stock price up and the seller ends up paying capital gains tax, he said.
“I am in favor of share buybacks. In a market like Pakistan where the share price is lower than the asset price, it is an effective tool to bridge the gap,” he said.
Posted in Dawn, November 6, 2022