Indiamart buying back its stock at a 37% premium over market price. A fun read to understand why

[redeemedtomanhood]

@mekhappes But that can mostly be achieved through a dividend too. Take an example -

Say a company is worth Rs 100, with founder having 50%. Founder is in the 30% tax bracket.

Option 1: Announce a (total) dividend of Rs 30 - founder gets 50% = Rs 15, pays 30% tax and gets Rs 10.5 after tax. Company's value becomes 100-30 = 70. His net worth is Rs 10.5 + Rs 35 = Rs 45.5.

Option 2: Buy back total shares worth Rs 30. Founder gets Rs 15, pays 10% tax to get Rs 13.5 after tax (See edit). Company pays 20% tax = Rs 6. Company's value becomes 100-30-6 = 64. His net worth is Rs 13.5 + Rs 32 = Rs 45.5.

So yes, the founder (like the other shareholders) get slightly more cash in hand in option 2. But the value of the company falls proportionately. So note:

1. His net value is the same. So it is not that he is benefitting from the buyback at the expense of smaller shareholders, as OP is insinuating.
2. The tax paid to the govt is the same. So this method does not achieve any tax benefits either.

Edit: Buy back is actually more tax friendly - refer to Survivor1338's comment in the other thread. However, as pointed out here, this does not help the founder disproportionately - in fact, the founder stands to lose since retail investors get a higher % in the buyback due to the 15% quota.

 

[mekhappes]

@redeemedtomanhood This is true if company holds any future value

 

[elpasoautotransport]

@redeemedtomanhood If the company pays 500cr cash, how does its "VALUE" decrease by 500cr? What do you mean here, stock price? turnover? shareholders equity? What?

 

[redeemedtomanhood]

@elpasoautotransport Market value of the company. Ie, share price*no of outstanding shares.

As to the how- it is simple. The value of the company is (roughly) equal to the sum of its net assets and discounted future earnings. Paying out (excess) cash reduces the former and does not change the latter.