Buyback of shares in India is a relatively new concept and has started gaining momentum recently amongst millennial (young) investors.
The buyback of shares is governed by SEBI (Buyback of Securities) Regulations 1998 which lays down the guidelines for the buyback process. The 1998 regulations have recently got replaced with SEBI (Buyback of Securities) Regulations, 2018.
In this article, we shall discuss the top 10 most basic FAQs to understand buyback in general.
1. What is the buyback of shares?
A buyback of shares is a corporate action event wherein a company purchases its stock from the existing shareholders at a price higher than the current market price. The buyback of shares in India is generally done either through a tender offer or an open market offer through the Stock Exchange. The buyback of shares also known as Shares repurchase, allows a company to strengthen the promoter holding, utilize the free cash reserves optimally by rewarding the shareholders, and achieve the optimum capital structure.
2. Why buyback of shares is done?
The buyback of shares is beneficial to a company as well as the shareholders. A company announces a buyback on account of various reasons stated below: The buyback helps a company to boost the share prices of their undervalued stock. The surplus cash returned to shareholders via buyback helps boost shareholder value and confidence. The buyback acts as a finance reengineering tool to achieve the optimum capital structure. The buyback helps increase the promoter's stake and thus acts as a defense strategy to protect them from the threat of hostile takeovers. The buyback allows shareholders to exit at a premium price as buybacks are offered at a price higher than the current market price.
3. Why would a company buy back its stock?
The buyback of shares allows a company to invest in itself and offers various benefits for such investment. A company opts for a buyback to avail of the below advantages of purchasing its stock. The buyback reflects a healthy financial status of a company. The buyback helps a company to consolidate its ownership. The buyback helps the share prices to boost. In the case of slow-moving markets, buyback helps support and preserve the stock value. The buyback tends to improve the Key financial ratios and enhance the shareholder value. The buyback is an effective way to utilize the ideal free capital that helps boost shareholders' confidence in the company. The buyback acts as a tool to achieve the optimum debt-equity ratio for a company by repurchasing the required equity from the market.
4. How will shareholders benefit from the buyback of shares?
The shareholders also get to enjoy the benefits of a buyback as much as a company does. The buyback provides an opportunity for shareholders to exit at a price higher than the current market price. The buyback increases the percentage of shareholders' ownership in a company due to a reduction in the total number of outstanding shares. The buyback serves as a health check of a company's healthy financial position. The capital gains made in buyback are exempted from tax for the shareholders.
5. Who can participate in the buyback of shares?
Two factors decide the eligibility of a person to participate in the buyback of shares: Whether the person is an existing shareholder; and Whether the shares are in Physical or Demat form. To be eligible to participate in the Tender offer buyback, a person needs to be an existing shareholder as on the Record Date of the buyback offer. In the case of an open offer, any shareholder holding the shares of that company during the buyback period can participate in the buyback offer. In the Tender offer, the shares can either be in physical form or Demat form. While in the case of an open offer, generally only the Demat shareholders can be a part of the buyback offer.
Note: The buyback of physical shares in an Open offer requires the company to maintain a separate window for the buyback of physical shares and follow a set of guidelines, as stipulated by the exchange for the physical stock. Thus, to avoid this, not many companies allow the physical shareholders to participate in the open offer buyback unless their shares get dematerialized.
6. Can physical shares be offered in the buyback?
A physical shareholder can participate in the Tender Offer. However, in the case of an open offer, a physical shareholder is generally allowed to participate only once their shares get dematerialized. The companies allowing physical shareholders to participate in an Open offer need to request the Exchange for a separate window for the Buyback of Physical shares. But not many companies opt for this route but allow only Demat shareholders to avail of the open offer.
7. How does buyback affects share price?
A buyback generally has a positive impact on the share price and, the share price tends to rise once the buyback gets announced. The share price tends to rise due to the shortage in the supply of shares that gets created due to the shares repurchased by the company. Another reason for the increase in the price rise is the increased investor confidence in the company's financials as only a company with healthy financial can announce a buyback. With a reduction in the number of outstanding shares and earnings remaining the same, the EPS also improves significantly, leading to a price rise.
8. How does the buyback of shares work?
A buyback of shares is an event where the company purchases its own stock. The buyback of shares in India is generally done using the below two modes: Tender Offer Open Market Offer through Stock Exchange mechanism. In a tender offer, the company offers to buy the stock at a fixed price from the existing shareholders that are on the company's records as of the record date. The tender offer involves a buyback ratio in which the company can buy back the stock from the existing shareholders. Even the physical shareholders can participate in the Tender offer by tendering their physical share certificates. A tender offer is generally open for ten working days. In an open offer, there is no concept of record date or buyback ratio. Any shareholder holding the company shares during the buyback period can participate in the buyback. Generally, only the shareholders who hold the stock in Demat form are allowed to participate in the open offer barring a few exceptions. The open offer buyback remains open for about six months.
9. How is the buyback of shares done?
Buyback of shares is done out of the free reserves of the company. As a first step, the company desiring to go for buyback needs to approve the buyback proposal in the board meeting and decide on the mode of the buyback. Post the buyback proposal is approved, the below sequence is followed to complete the buyback. The company makes a public announcement mentioning the mode of buyback. The company issues a letter of offer and a Tender form. (applicable in case of a tender offer) Interested shareholders approach their stockbrokers to tender their shares for buyback or put their bid for buyback in case of an open market offer. The stockbrokers then submit the tender forms and other applicable documents to the company registrar and also place a bid in case of a tender offer. In case of an open offer, the stock broker places a sell order against the buy order placed by the company for the buyback. The registrar verifies the tender forms and informs the exchanges of the acceptance/non-acceptance of the tendered Equity shares. The acceptance of the shares in an open market offer happens based on order matching and gets executed on relevant pay-out dates. The shareholder receives due consideration in return for the accepted shares. As the last step, the company destroys the shares purchased by them within a stipulated timeframe.
10. How buyback of shares can be made?
The buyback of shares can be made through your stockbroker. The interested shareholders that are eligible to participate in the buyback offer need to approach their respective stockbrokers indicating the details of the shares that they want to offer in the buyback. The stockbroker, in turn, places an order on your behalf on the exchange platform. You get cash in return for the successfully accepted shares. Points to note: The physical shareholders need to submit the physical share certificates along with required documents to the stockbroker. The acceptance of shares in the case of an Open offer is based on the order matching mechanism. The acceptance/non-acceptance of shares in the case of a Tender offer is decided by the Registrar based on the details provided in the Tender form.
Is buyback of shares good or bad ?
The buyback of shares is generally perceived as a good opportunity by the shareholders as it provides an easy exit route at a premium price.
However, one should not view the buyback offers just by the price but should also understand the company goals, and financials and then decide to participate in the buyback based on one's risk appetite and holding capacity
Bonus list of the stock names with buyback offers (some BB might have been closed as the list is since Diwali of 2021)
Jul 05, 2022 - Birlasoft Limited (NS:
Jun 27, 2022 - Matrimony.Com Ltd (NS: MATI );
Jun 01, 2022 - Avonmore Capital & Management Services Ltd (BO: AVCA );
May 25, 2022 - Zydus Lifesciences Ltd (NS: ZYDU );
May 23, 2022 - Asahi Songwon Colors Limited;
May 20, 2022 - Motilal Oswal (NS: MOFS ) Financial Services Limited;
May 03, 2022 - Indiamart Intermesh (BO: INMR ) Ltd;
Apr 27, 2022 - Sinclairs Hotels Ltd (BO: SINL );
Apr 27, 2022 - Sarda Energy Minerals Ltd (NS: SAEM );
Apr 22, 2022 - AKC Steel Industries Limited;
Apr 04, 2022 - GAIL (NS: GAIL ) (India) Limited;
Mar 31, 2022 - Filatex India Ltd (NS: FLTX );
Feb 14, 2022 - Tata Consultancy (NS: TCS ) Services Limited;
Feb 14, 2022 - FDC (NS: FDC ) Limited;
Feb 14, 2022 - Gulf Oil Lubricants India Ltd (NS: GOLU );
Feb 10, 2022 - Mayur Uniquoters Ltd (NS: MAYU );
Feb 10, 2022 - K.P.R. Mill Limited;
Jan 05, 2022 - James Warren Tea Ltd (BO: JWTL );
Dec 31, 2021 - Ajanta Pharma Ltd (NS: AJPH );
Dec 22, 2021 - MOIL Limited (NS: MOIL );
Dec 08, 2021 - Cheviot Co Ltd (BO: CHVI );
Dec 07, 2021 - MPS Limited;
Dec 03, 2021 - Weizmann Limited
Nov 23, 2021 - Nucleus Software Exports Ltd (NS: NSEL )
Nov 11, 2021 - eClerx Services Limited (NS: ECLE )
Disclaimer: The above article is for self-educational purposes. Research conducted by the following students: JETAge and Pratyusha for learning. purposes.
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