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Buybacks Overtake IPOs
Sep 13, 2017

Even when North Korea is flexing its muscles and threatening war, the stock markets are buzzing. And companies are leaving no stone unturned to take advantage of this optimism. This is evident from the number of new initial public offers (IPOs).

A rising market like this one is an excellent opportunity to raise primary capital as most investors get carried away by the market euphoria and IPO hype, which makes them more likely to overlook the underlying fundamentals of the companies offering shares.

Meanwhile, many other companies make the best of the rising markets by extinguishing their liabilities through share buybacks.

Even the market regulator has expressed concern about the amount of share buybacks relative to fresh capital in the domestic market. In the past two years, the quantum of share buybacks has far exceeded the amount of new equity capital raised.

As is evident from the chart, so far this fiscal, India Inc has extinguished shares worth nearly Rs 235 billion through twenty buybacks - 2.3 times more than the Rs 100 billion raised by way of initial public offerings. Similarly, in the last financial year, companies repurchased shares worth Rs 340 billion through 49 buybacks while 25 IPOs had raised Rs 282 billion cumulatively.

In the last two years, buybacks have gained currency as a tool to reward shareholders after the government imposed an additional 10% tax on dividends.

Any dividend received in excess of Rs 1 million is now taxable at a rate of 10% in the hands of the recipient. This is in addition to the Dividend Distribution Tax (DDT) already levied on the company.

The measure - aimed at those receiving significant amounts of dividends - did not go down well with India Inc. Rather than pay dividends, many companies opted to use their surplus cash on share buybacks, which carry no such levy.

With multiple IPO offers lined up, it will be interesting to see if the trend of more buybacks than IPOs continues.

Data Source: Prime Database, Business Standard

This Chart Of The Day was published in The 5 Minute WrapUp - Will North Korea Cause the Greatest Pain the Market Has Ever Experienced?

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