March 09, 2024 (MLN): "He (Biden) also wants to quadruple the tax companies must pay when they buy back their stock to 4% from 1%."
This caught the idea of your author. Buybacks have been rampant globally and with recent ease in Pakistan – coupled with dirt-cheap valuations – a lot of sponsors have been grabbing the opportunity wherever possible.
Yes, these are certain lazy executives/sponsors who would rather buy shares through front men/women instead of giving benefits to minority shareholders.
Nearly PKR 46B worth of shares have been bought through buybacks on PSX and major sponsor buying (HBL's through AKFED). The quantum is substantial according to Pakistan's standard with the likes of HBL, Engro, Lucky Cement, Maple Leaf, Bank Alfalah, JDW Sugar, TPL Properties, Synthetic Products (SPEL) and NETSOL.
This is a good beginning as it offers investors opportunities to exit while determining pseudo floor prices on valuation.
But of course, sponsors do it to make money for themselves in the medium to long term. There is clear gain which is expected to be made from such transactions. And yes mostly the gain goes to rich sponsors who happen to hold most of the control and shareholding(s) with some benefit to minority shareholders.
Inequality in income needs to be tamed one way or another. Maybe tax only the majority shareholders, you decide.
The merits of taxing the buyback are 1) it's a tax on the elite 2) it's a tax on expected profits 3) it's better than a tax on bonus shares (extremely absurd) 4) nudges companies to invest in long-term growth 5) better utilized in the form of dividend and let minority shareholders decide where to invest.
So should it be taxed like Biden envisions? Probably not. But arguments do exist when salaried classes are being further squeezed.
The author is an independent economic analyst and writes on Twitter and Linkedin.
