Latest Buyback of Shares in India

What is Buyback?

A share buyback is a corporate initiative undertaken by a company to repurchase its own listed shares, thereby decreasing the number of shares available in the stock or open market. Companies engage in share buybacks with the goal of enhancing the value of the remaining shares. This is achieved by diminishing the supply available to shareholders, effectively allowing the company to exert control over its stack in the open market through the buyback process.

Understand the Share Buyback

The company is initiating a Buyback offer as a strategic investment in its own entity. This initiative aims to reduce the number of shares available in the market while increasing the company’s holdings. When a company perceives its shares as undervalued, a buyback offer is introduced to provide current investors with a favorable return. If the company maintains a positive outlook on its current operations and business prospects, the buyback can enhance the proportion of earnings.

In certain instances, maintaining the same price-to-earnings (P/E) ratio may result in a rise in the stock price. Another rationale for a buyback is to allocate repurchased shares to the company’s employees and management through stock rewards and options. The company submits a letter of offer to SEBI, securing approval for the share buyback. The company determines key parameters, including the ratio of shares, the quantity of shares, the buyback amount, the buyback type, the record date for investors, and the open and close dates. Following the buyback schedule, the company commences the buyback process in the open market.

Buyback Offer Types and How Buyback Works

There are two types of buyback offers: tender offers and open market offers.

1. Tender Offer: In this type, the company invites shareholders to tender their shares at a premium, a price determined by the company. Eligible investors can apply for the buyback through their Demat or trading accounts. The company purchases the shares according to the predetermined ratio specified in the buyback offer.

2. Open Market Offer: In this variant, the company acquires its own shares directly from the open market via exchanges. Shareholders can sell their shares during the timeframe specified by the company in the buyback offer. Open market buyback offers typically extend over several months as the company actively purchases shares from the open market.

Why do Companies go for Share Buyback?

Investors have the opportunity to participate in the buyback offer during the open window period. Typically, companies offer a higher value for the shares in the buyback. To illustrate, consider the following share buyback example: If ABC Limited initiates a buyback offer at a price of Rs.1000, while the current market price is Rs.600, investors stand to receive a Rs.400 premium against their holding price. Investors who do not already possess the stocks in their Demat accounts can purchase them before the record date established by the company.

Companies opt for buyback offers for various reasons:

1. Reducing the Number of Shares: Companies aim to decrease the volume of shares in the open market.

2. Perceived Undervaluation: When a company believes its share price is undervalued, it may choose to conduct a buyback.

3. Enhancing Shareholder Value: Buybacks are employed to improve the overall value for the company’s shareholders.

4. Boosting Share Price: Companies undertake buybacks to contribute to an increase in their share prices in the open market.

5. Excess Cash: When a company has surplus cash reserves, it may opt for a buyback as a means of utilizing these funds.