KARACHI: WhatsApp groups are abuzz with speculations about the possibility of a tax on share buybacks — an increasingly popular practice that lets listed companies purchase their own shares on the stock exchange to improve their market value.

Firms that carried out share buybacks recently or are currently conducting the exercise include Netsol Technologies Ltd, Maple Leaf Cement Factory Ltd, Lucky Cement Ltd and JDW Sugar Mills Ltd.

Big companies in developed economies ramped up their share repurchases in recent years, thanks to the excess cash on their balance sheets. The exercise results in higher earnings per share as their total number of shares goes down and break-up values improve.

Businesses repurchase their shares to either cancel them altogether or hold them as treasury stocks, which effectively reduce their free-float or shareholding that’s tradeable on an exchange.

The sustained increase in share buybacks in the United States recently prompted the Biden administration to impose a one per cent excise tax through the Inflation Reduction Act. Canada followed suit in the outgoing week, with Prime Minister Justin Trudeau’s government announcing a 2pc tax on companies repurchasing their shares from the stock exchange.

Should the government also tax the share buybacks on the Pakistan Stock Exchange?

After all, companies burn their “distributable profits” to carry out such transactions. The same accumulated cash would otherwise be used for either dividend payments or business expansion.

In the process, the government loses the tax it would’ve collected on dividend disbursement in the first case or compromises the future economic activity in the second instance.

Speaking to Dawn, Arif Habib Commodities Ltd CEO Ahsan Mehanti said taxing share buybacks is mainly a developed-world phenomenon where markets are overheated and dividends are usually small.

“Buybacks discourage (share) price discovery, volumes shrink and reduce (the number of) shareholders in developing markets… So taxing them can raise the government’s revenue and help markets develop,” he said.

AKD Securities Ltd CEO Muhammad Farid Alam told Dawn any tax on share buybacks should be discouraged as the transaction involves no immediate income generation of any kind.

“These are rare transactions anyway. Valuations are already down. A tax at this stage will only hurt the little activity that’s finally gathering some pace,” he said.

In view of Mohammed Sohail, CEO of Topline Securities Ltd, it’s incorrect to say that share buybacks don’t generate tax for the government. A buyback leads to a share price rally, and the seller ends up paying a tax on capital gains, he said.

“I’m in favour of share buybacks. In a market like Pakistan where the price of the share is less than the price of the asset, these are an effective tool to bridge the gap,” he said.

Published in Dawn, November 6th, 2022