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New Tax Law Fuels Share Buyback Revival
Indian companies are increasingly launching share buyback programs. This trend is largely due to a tax law change taking effect on April 1, 2026. The Finance Act, 2026, now treats buybacks as capital gains for tax purposes, instead of a 'deemed dividend'. This change makes buybacks much more tax-efficient for shareholders who are not company insiders. Low stock valuations in several sectors are also encouraging companies like Wipro, Aurobindo Pharma, and Cyient to announce new buyback plans.
Market Slump and Strategic Reasons for Buybacks
Buybacks are returning during a tough market period. The Nifty 50 index has seen a small dip of about 0.59% in the last year, while the Nifty IT index has fallen much harder, down nearly 17.9%. This market drop allows companies with strong cash reserves to show that their shares are undervalued. Foreign investors have also continued to sell stocks, with outflows reaching ₹48,141 crore in the first half of April 2026. In this climate, buybacks help offset foreign selling and lift local investor confidence. They also improve financial measures like earnings per share (EPS) and return on equity (ROE).
Historical Context of Tax Shifts
Buyback activity had previously dropped significantly. In fiscal year 2026, only 16 companies bought back shares totaling ₹19,500 crore. This is a sharp fall from ₹50,750 crore in FY24, when tax rules were more favorable. The way buybacks were taxed has changed quickly over time, moving from a tax paid by the company to a tax on shareholders' dividends (sometimes over 40%) before the current capital gains system.
IT Sector Faces Deep Declines
The IT sector, a key part of the Nifty 50, is currently trading at a price-to-earnings (P/E) ratio of about 20.0. This is seen as quite undervalued compared to its average P/E of 27.13 over the past seven years. Even with a broad sector decline this past year, with year-to-date returns around -25.9%, major IT companies are proceeding with buybacks. Wipro, valued at roughly ₹2.15 trillion with a P/E of 16.3, provides a dividend yield of 5.36%. Its share price is down 17.87% over the year, reflecting the sector's challenges. Cyient, a smaller IT firm with a market cap near ₹9,837 crore and a P/E of 20.6, has also seen its stock price fall about 20.20% in the last year.
Pharma Sector Shows Resilience
In contrast, the pharmaceutical sector has shown more stability, with a 1-year compound annual growth rate (CAGR) of 7.72%. Its P/E ratio is around 33.8, which is considered fairly valued. Aurobindo Pharma, a major company with a market cap near ₹82,183 crore and a P/E of 23.3, has had a modest 1-year return of -2.04%. Although Aurobindo Pharma typically pays dividends, its recent performance and five-year sales growth have been described as weak.
Underlying Concerns Remain
However, significant challenges remain despite the strategic benefits of buybacks. Foreign portfolio investors continue to sell, with outflows nearing ₹1.8 lakh crore for the year up to April 2026, indicating a general caution towards the Indian market. The IT sector faces direct selling from these investors, losing ₹1,325 crore in early April. Buybacks can boost earnings per share (EPS) but do not fix core growth problems. For companies like Cyient, which reported a net loss last quarter and has a low return on equity (ROE) of 7.79%, buybacks offer only temporary relief. Aurobindo Pharma's slow five-year sales growth of 6.55% and low ROE of 11.1% also point to underlying issues that buybacks cannot solve. Furthermore, if companies choose buybacks over investing in growth, it could signal a lack of promising long-term investment opportunities.
Buyback Trend Expected to Continue
This trend of increased buybacks is expected to continue, particularly in uncertain markets. Companies use them to stabilize stock prices and improve financial results. The Securities and Exchange Board of India (Sebi) is also considering reintroducing open-market buybacks, which would give companies more flexibility to buy shares over time. These regulatory moves, along with the beneficial tax changes, should keep supporting share repurchase programs as a way to reward shareholders alongside dividends.