SHARE BUYBACK have received a lot of attention and buzz in recent days after technology giants like Tata Consultancy Services, Infosys and Wipro announced buyback offers. So, it is the most trending topic for the shareholders and the investors as well.
Buyback of shares is a corporate action where a company buys back its shares from existing shareholders which is also known as a “share repurchase”, occurs when a company buys back its shares from the marketplace at a par price or higher price compared to market. Usually it is done by the companies that have excess cash with no current investment or other requirements consider buybacks. Reducing the number of shares helps improving the earnings per share for existing shareholders and holds up the return on equity. It is normally used when the management feels that the share price is trading below its fair value or when the promoters want to increase their holding in the company.
Share Buyback can be done using two options:
OPEN MARKET: Under the open market mechanism, the company can buy back its shares from the secondary market and it’s not necessary that the shares are sold at a higher price. One may or may not get the maximum price quoted by the company.
TENDER OFFER: Under this option, an offer is made to purchase some or all of shareholders’ shares in a firm. The price offered is usually at a premium rate compared to the market price for value addition. Tender offers provide several advantages to investors. Investors are not obligated to buy shares until a set number are tendered, which eliminates large cash outlays.
SHARE BUYBACK PROCESS: To carry out the entire buyback process, a series of steps is involved for a better understanding.
Public Announcement about the buyback process is conveyed by the Board of Directors to the public which includes the no. of shares available for buyback, the quoted price of the shares, the method used for buyback (open market or tender).
Usually after 1 week to 30 days the company communicates to the public via stock exchanges in the form of “Draft Offer Letter”. The details such as record date, source of funds for buyback etc are explained in it.
Post Buyback Announcement is made by the company where the Company announces the actual number of Shares Company has buy backed. The actual acceptance ratio is communicated in the public domain.
HOW SHARE BUYBACK HELPS INVESTORS
A buyback benefits shareholders in many ways such as by increasing the percentage of ownership held by each investor by reducing the total number of outstanding shares. In the case of a buyback the company is more focused on increasing its shareholder value rather than diluting it.
When companies pursue buyback programs, this helps investors to analyze that the company has additional cash in hand. If a company has excess cash, then at any worse situation the investors need not to worry about the investments done by them.
From shareholder’s point of view, it is usually better than a bonus or a dividend issue as they get an option to choose between different alternatives to maximize their benefits. Investors who do not wish to stay invested in the stock can use the share buyback offer to exit at a significant premium to the market price.
The Securities and Exchange Board of India (SEBI) revised the share buyback regulations that stipulate 15% reservation for retail shareholders in a share buyback offer. This gives retail investors an option to have a fair share in the offer, which otherwise could see large institutional investors leaving very less chances for small investors.