What are share buybacks in trading?

When a company repurchases the shares of a stock that was issued by the same company, this is referred to as share buyback. Typically, buybacks are seen when the issuing company pays its retail investor shareholders in the market value per share. The company then opts to reabsorb some part of its ownership which it had previously distributed among both private and public investors in the form of share buybacks.

What is the function of Share Buybacks?

Company-approved share buybacks allow an investor to gain value on their invested amount in the scripts they have allotted as a buyback. Through the process of share buybacks, companies are able to distribute cash reserves or excess reserves to their shareholders. Specifically, they do so when they choose to repurchase the floated shares at a premium without any further plans for expansion.

How to apply for share buyback?

Now if you are wondering ‘how do I apply for a buyback?’ we’ve got you covered. When it comes to share-buyback schemes, the capital market regulator has compulsorily reserved a buyback portion of 15% for retail investors who possess in-hold shares in a company worth upto ₹2 lakhs. This percentage is also taking into account the scrip’s market value as seen on the record date of the buyback offer.

The very first point to keep in mind is that you should be aware of the option to tender shares. Similar to how one buys shares through their Demat account, the same way one can tender shares during the offer by visiting their online Demat account. If the offer for a buyback has just been opened by the company, you will see it flash as a distinct buyback option or under an ‘Offer for Sale’ option depending upon your brokerage.

To acknowledge the return the buyback offer will fetch you, you are required to check the price that is fixed for a buyback. Simultaneously, the validity of the offer also matters. The number of days you are permitted to buy back shares is crucial as this is the only period within which shares may be repurchased by your company.

When people look up how to apply for buyback of shares online, another parameter that is often brought up is the record date. The record date helps assess whether you can apply for a buyback or are even eligible to receive one in the first place. The record date is the date before which you are required to have shared in your portfolio to become eligible for a buyback. If you exceed this date without having any shares, you will not be able to apply for a share buyback.

During the application process of share buyback, you will be given a tender form by the company. This form is where you enter the number of shares of that company that you wish to tender. There is a ratio of acceptance attached to the tender form which signifies how likely the company is to accept your request for share buybacks. Different companies have different ratios for share buybacks.

Here is what you can expect in a typical tender form given by a company. There are normally three fields as follows:

  1. The number of shares you hold from the said company as on the record date
  2. The number of shares that fit the eligibility criteria for buybacks
  3. The number of shares that one is applying for a buyback.

Once the application is made, the shares that have been booked for the offer are transferred to the R&T agent of the company. The brokerage house will also share the acknowledgment of your request for share tender with you in the form of a transaction registration slip or email. Any offer from the customer for share tenders that are made over and above the acceptance ratio of the company will be credited back to the applicant’s Demat account during the course of their transaction being processed.

After the shares are tendered which depends upon the number of retail investors and share count applied during the tender, the acceptance ratio for the company’s buyback scheme is estimated. In summary, the answer to how to apply for buyback of shares is to apply via the tender form provided by one’s company and consider parameters like the record date, and the price at which the share will be fixed for its buyback.