What is a Share Buyback?

What is Share Buyback?:

• When a listed company buys its own shares from the existing shareholders, it’s known as a share buyback, which is also called a share repurchase.
• The process reduces the number of outstanding shares in the open market over a period of time.
• A company can buy back its shares from shareholders on a proportionate basis through a tender offer, or from the open market via book-building process, stock exchanges, or from odd-lot holders.
• The maximum limit of any buy-back is 25 per cent or less of the aggregate of paid-up capital and free reserves of a company.

 

What are the reasons for share buyback?

• One of the reasons for a company to go for the buyback of shares is when it feels that its stock is undervalued or has fallen too much.
• By buying outstanding shares, a company reduces the number of shares in the market and this can increase the value of the remaining shares.
• Share buyback also helps in increasing the promoter shareholding, which can act as a safeguard against any threat of hostile corporate takeover.
• There were instances when promoters also participated in the buyback and surrendered their shares.

 

What is the benefit for shareholders?

• Through buyback, a company can reward its shareholders in a tax-effective manner.
• The dividend that a company pays is taxed at the company level and also at the shareholder level.
• In the case of share buyback, the company pays the tax and shareholders are exempted from paying tax on the income generated in the process.
• If the company offers a higher price than the market price, shareholders, who are not keen to stay invested in the company, can surrender their shares and exit.
• While a company can go for repurchase of its shares when it is sitting on a lot of cash but does not have many avenues to invest and prefers to return cash to shareholders.

 

Who is eligible to participate in the buyback?

• To be eligible to participate in the share repurchase process, a shareholder needs to hold the shares of the company, which has announced the buyback, before the record date declared in the announcement.
• The share also needs to be held in the demat form.

 

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Q1) What is Book Building?

Book building is the process by which an underwriter attempts to determine the price at which an initial public offering will be offered.

Source: Indian Express