What is Buyback of Shares?
It is the process wherein a corporation rebuys its own shares from its shareholders. This way, the company that had earlier issued shares pays some of its shareholders and absorbs that part of ownership which several investors had before.
A company can do so for a variety of reasons. Some of them could be a consolidation of ownership, boosting the finances of the company or undervaluation.
- • When a company buys back shares, the process may make it look more healthy thereby drawing investors.
- • For many companies, the answer to the question of what does share buyback mean is that it avoids any chances of acquisitions or takeovers by another party.
- • Some companies opt to buy back shares so that the value of their equity goes back.
- • Many companies offer stock options to their employees. Such companies opt for buyback of shares so as to ensure that a certain level of outstanding shares is maintained.
Types of buyback of shares
Below-mentioned are the most common methods through which a company can buy back shares in India.
1. Tender Offer
Under this route, the company buys back its shares from the existing shareholders on a proportionate basis within a stipulated time period.
2. Open Market (Stock Exchange Mechanism)
In the Open Market Offer, the company buys back its shares directly from the market. This buyback process consists of buying back a large number of shares and is executed via the company’s brokers over a period of time.
3. Fixed price tender offer
In this method of buyback of shares in India, the company approaches shareholders via a tender. Shareholders who wish to sell their shares can submit them to the company for sale. As the name suggests the price is fixed by the company and is over and above the prevailing market price. The tender offer is for a specific period and is generally a short time.
4. Dutch auction tender offer
This is much like the fixed price tender but instead of a price that the company allocates in the fixed price tender, here the company provides a range of prices that shareholders can pick. The minimum price of the stock is higher than the market price prevailing then.
Dividends: Implications due to buyback
Payments of dividends often don’t ensure great flexibility for the company. Dividends need to be paid on specific dates and all common shareholders would need to be paid. However, when a company buys back shares, it ensures greater flexibility. Dividends need to be distributed to every shareholder but when there’s a buyback, the dividend can be paid only for the shareholders who opt for it. Also, dividends would mean companies have to pay dividend distribution tax or DDT. For investors too, if income from dividends crosses Rs 10 lakh, they would have to shell out extra tax.
When there is a buyback, tax rate is based on the duration for which the security is held.If shareholders were to give up their shares for buyback after holding them for a year, they would have to pay 10 per cent taxes on their income. If the sale is made under a year of holding the shares, short term capital gains of 15 per cent come into play.
Now that you are aware of the buyback of shares definition, it’s time to consider what does share buyback mean for investors and shareholders.
The buyback of shares definition gives you a fair idea of what it means to companies but it is also an attractive proposition for investors. Here’s how: when a company buys back its share, the number of outstanding shares comes down and the earnings per share or EPS goes up. If a shareholder doesn’t sell their ownership of shares, it means they now have a larger percentage of ownership of the company’s shares, and a resultant higher EPS.
For those who decide to sell their shares, the buyback means they get to sell at a price that is agreeable to them.
Another answer to what does share buyback mean for investors is that it signals that the company has access to excess cash. It means the company does not have any problems pertaining to cash flows and the investors feel secure in the knowledge that the company has used that cash to reimburse its shareholders instead of investing in other assets.
Factors to keep in mind when you think of acceding to a buyback:
- • The price of the buyback is important. As a shareholder, you would need to know the exact price at which your shares will be bought back by the company. This determines if the offer is beneficial to you or not.
- • The premium is another factor, defined as the difference between the price and the price of buyback and the price of the company’s share at the date of the offer. If the premium offer is higher than the value of the company’s stock you own or its potential, then you can sell your shares.
- • The size of the buyback offer is also significant as it indicates the money that the company is willing to shell out for the shareholders and the health of the company.
- • Keeping track of the many dates in the buyback process, from the date of approval, announcement, opening, closing to the verification of the tender form and settlement of bids are significant.
Apart from tracking all these factors, it is important that a shareholder looks at the company’s track record, its profitability, leadership and vision, apart from its growth path and take a call based on comprehensive research.
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:
- The number of shares you hold from the said company as on the record date
- The number of shares that fit the eligibility criteria for buybacks
- 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.
Buyback of shares is therefore an easy process. Use a trusted broker like Angel One to secure all trades with adequate information.