The buyback of shares is an interesting concept that you as an investor can benefit from. Last year, 44 companies announced buybacks summing to ₹18,703 crores.
TCS (Tata Consultancy Services) and One97 Communications were also on the list. Let us help you to understand everything about the buyback of shares!
Buyback of Shares: Meaning and Purpose
The buyback of shares is the act by which publicly listed companies purchase existing shares back from their stock market investors. Companies do this to reduce their share capital.
By paying a price that’s higher than the current market price to buy their shares back, companies incentivize their stock market investors to sell at a profit.
Among various underlying motivations behind share buyback programs, the primary ones are as follows:
- The issuing organization may find the need for optimized capital allocation, and deploy surplus funds effectively
- The organization may want to invest in itself and increase its ownership stake
- There is a goal to maintain shareholder confidence by potentially increasing earnings per share with the reduced total number of outstanding shares
For a simple illustration, let us say a listed company issued 2,000 shares previously to raise capital. One of its shareholders owns a 15% stake, that is, 300 shares.
The company repurchases its 200 shares and reduces the total number of outstanding shares to 1800. As a result, the shareholder’s stake would increase from 15% to 16.67%, leading to an increased share of the profits.
A company buying back its shares is known as a Corporate Action.
Process of Buyback of Shares
A listed company may choose one of the following routes to buyback shares.
1. Open Market Share Buyback Mechanism
Listed companies opting for the open market mechanism can buy back their shares via stock exchanges.
The buyback period is active for a set period of time for which the company sets a fixed maximum buyback price.
Once the buyback period ends, the money is credited to an investor’s demat account if their shares were bought back.
2. Tender Offer
If the company follows the tender route, shareholders transfer the shares directly to the company at a price specified in the Letter of Offer. These are privately negotiated transactions.
With this flexibility, companies can align their specific purposes with tailored repurchase strategies.
Why Companies Buy Back Shares
Investors should consider the underlying causes making companies buy back their shares to benefit from such affairs. common reasons for the share repurchase include the following:
1. Consolidating Ownership
Companies issue thousands of equity shares to raise capital from the public. It disperses its ownership among thousands of shareholders.
Many shareholders can have voting rights that impact the company’s management. For ownership concentration, the companies can decide to repurchase their shares.
A reduced number of shareholders allows them to have more influence over decision-making.
2. Boosting Equity Valuation
If a company believes its shares are undervalued in the market, it can announce its buyback program.
Repurchasing their own shares enables companies to decrease the number of stocks available and increase their ownership stake, leading to raised share prices.
3. Utilising Excess Funds
Fundamentally strong stocks of companies may have funds that they don’t immediately need for growth prospects or other projects.
Thus, instead of just putting the money in bank accounts, they often decide to buy back their own stocks from the market.
It helps them to retain their shares more valuable by increasing the value of the remaining shares.
4. Reducing Debts
Companies return debt to shareholders in the form of buybacks. That’s why share buyback programs favor companies’ financial standing.
Repurchasing their undervalued shares allows companies to utilize their excess funds to enhance shareholder value.
5. Rewarding Employees
There are times when companies look to reward their employees with stock options or outright stock ownership. Buying back shares from investors on the stock market can help the company compensate or reward employees instead of diluting their existing shareholding pattern.
Upcoming Buyback of Shares
If you want to benefit from buybacks, you may consider the upcoming buyback of shares. A few of the upcoming stock buybacks are mentioned below:
1. Wipro Limited
Wipro ran a “Tender Offer” buyback program for a maximum aggregate amount of ₹12,000 crores from the shareholders. The buyback approval price is ₹445 and the premium is 18.87% of the market price. The buyback will close on June 30, 2023.
2. Axita Cotton Limited
Axita Cotton Ltd also took the Tender Offer route to buy back its shares at ₹56 per share (96.91% premium). The market price of a share on Buyback approval was ₹28.44. The buyback offer size was ₹5.04 crore (9,00,000 shares) and the buyback period ended on June 14, 2023.
Bombay Stock Exchange (BSE) approved a share buyback worth ₹374.80 crores on July 06th, 2023. The buyback will be conducted as a tender offer, with BSE aiming to buyback 45,93,137 shares and each share will be bought back at ₹816.
Investors looking at the company’s strategic and financial considerations can make informed decisions while considering offers for the buyback of shares.
Companies provide periodic updates to their shareholders regarding the share buyback program, including the duration of the program.
Later, if a company decides to reissue the shares repurchased under the buyback program at a reduced price, you can grab this opportunity for potentially significant profits.
While many find share buybacks suboptimal, others consider it the strategy for capital optimization by companies.
By the way, you can track upcoming corporate actions like the buyback of shares on Dhan. Watch the following video to know more!