Buyback is a corporate action in which a company invests in itself by buying back shares from the existing shareholders in the market. This process is also referred to as share repurchase.
Buyback of shares reduces the company’s outstanding shares from the market.
When a listed company wants to buy back its own share, it publicly announces its intention to do so through various channels.
In general, companies offer higher prices than the current market price to encourage participation of shareholders. The difference between the market and offered price is known as premium.
The decision of buying back shares from the open market is typically a part of corporate restructure decided at the board level of the company.
Buyback can be carried out in following two ways;
- Companies offer a price higher than the market price to their existing shareholders who can participate by submitting their willingness within a period of time to submit a portion or all of their shares.
- Companies can buy back shares on the open market at the prevailing price.
The main source of buy back of shares is from the company’s free reserves.
Here are recent buyback of shares for your reference;
- Zydus Lifesciences Limited at a price of Rs. 650 per equity share
- Motilal Oswal Financial Services Limited at a price of Rs. 1100 per equity share
- GAIL (India) Limited at a price of Rs. 190 per equity share
- Gulf Oil Lubricants India Ltd at a price of Rs. 600 per equity share
- Tata Consultancy Services Limited at a price of Rs. 4,500 per equity share
- Butterfly Gandhimathi Appliances Ltd at a price of Rs. 1433.9 per share
What can be the reason of buyback of shares
Here are few important reason why a company can go for buying back its own shares from the market;
- To improve profitability or earnings per share basis
- To increase the proportion of shares a company owns
- to reorganise its capital structure
- To prevent other companies from taking over the ownership
- To show the confidence of promoters about their future
- To return cash to shareholders
- To support share price in a declining market. If a stock is dramatically undervalued due to recession or for some other reason, the company can repurchase some of its shares at a lower level.
- To improve return on capital employed (ROE)
- To enhance overall shareholders’ value
Is the buyback of shares good or bad
In general, the buyback of shares at a higher premium price is considered as a good opportunity for shareholders.
However, if the company’s growth prospects and future performance is bright, then market participants prefer to remain invested in the company. It depends on investment goals, risk appetite and other factors.
Most of the times when a company announces buyback of shares, it indicates a positive sign. But it’s not taken positively by the market in all cases, especially when stock price is sharply falling due to management or industry issues.
