If you are investing your money in the stock markets, you might probably have come across a term by the name ‘share buybacks’ frequently, but might not be knowing about it in detail. Today we’ll dive deep into share buybacks in detail.
A share buyback is a corporate action where a company repurchases a fixed number of its outstanding shares trading in the market from its existing investors at a price that is at a premium or discount to the current market price. After the buyback, the number of outstanding shares of the company in the market reduces.
To illustrate, let’s assume that the stock of company ‘A’ is currently trading at a price of ₹100 and the company has 100 shares outstanding. If the company announces that it is going to repurchase 10 shares from the market, it represents 10% (10/100) of the total equity capital of the company. Now if the company announces that it is going to repurchase shares at ₹120, it is said to be at a ₹20 premium to the current market price.
- 1 What are the two methods of share buybacks?
- 2 Advantages of share buybacks
- 3 FAQ’s
A buyback allows a company to invest in itself. It increases the proportion of shares a company owns. There are two methods by which a company can conduct share buybacks:
The tender offer route
Under this method, shareholders have an option to tender a portion or all of their shares to the company during a fixed period at a fixed price announced by the company that is at a premium to the current market price. The premium to the prevailing market price entices investors to tender their shares rather than holding them.
The open market mechanism
Under the open market mechanism, companies buyback their shares from the open market over an extended period of time. The price at which the company buys back its shares can be at a premium or discount to the current market price. An advantage of buying back shares through this mechanism is that companies can time their purchases.
The following are the advantages of share buybacks:
- It can help in improving the earnings per share of the company. This can happen if the same amount of net income is divided by lesser number of shares, earnings on a per-share basis will tend to increase.
- Share buybacks can also be done to return surplus cash to shareholders. Rather than paying dividends, the company can use this method to reward its shareholders.
- Companies can also use share buybacks as a method to support its share price at times of sluggish economic environment. It can also be used to give signal to investors about the true intrinsic value of the company.
- Share buybacks can also be used to achieve an optimum capital structure. Buying back shares reduces the proportion of equity capital in a company.
- Share buybacks can also be used to control dilution in shareholding of existing investors due to the issuance of Employees Stock Option Plans (ESOPs).
Here are some past share buybacks in the Indian stock markets:
- NIIT Limited
- SIS Limited
- Quick heal Technologies Limited
- Smartlinks Holdings Limited
- National Aluminum Company Limited
Here are some active share buybacks in the Indian stock markets:
Ajanta Pharma Limited
The company announced a share buyback through the tender offer route. It made a public announcement on 31st December 2021 that it is going to repurchase 11,20,000 shares each at a price of ₹2550/share. The company announced the buyback price on 28th December 2021, on which the share price was around ₹2266. Hence the buyback price was at a premium of 12.5% to the company’s prevailing stock price on 28th December 2021.
Here’s a snippet of its share buyback announcement:
Nucleus Software Exports Limited
The company announced a share buyback through the tender offer route. It made a public announcement on 23rd November 2021 that it is going to repurchase 22,67,400 shares each at a price of ₹700. When the buyback announcement was first made on 24th September 2021, it was at a premium of 16% to the then market price.
Here’s a snippet of Nucleus Software share buyback announcement:
1) How can I come to know which company is coming up with a buyback?
Each company has to make a corporate announcement with the NSE and BSE. Also, the information pertaining to buybacks can be found on the website of the Securities and Exchange Board of India (SEBI).
No, it is not compulsory to tender shares in a buyback. The option to tender or not resides with the shareholder.
For tendering shares in a buyback, the company announces a period during which investors can tender their shares through their broker’s application.
No, if the number of shares tendered by the shareholders exceeds the number of shares the company wants to buy back, the tendered shares will get accepted in a proportionate manner.