What is Buy Back of shares?

Regaining Control and Rewarding Shareholders: Understanding Share Buybacks

In the dynamic world of finance, companies sometimes make strategic moves to repurchase their own shares from existing shareholders. This process, known as a share buyback or stock buyback, can be a win-win situation for both the company and its investors.

In this chapter, we’ll explore what share buybacks are, how they work, and their impact on shareholders.

Understanding Share Buybacks

A share buyback, also known as a share repurchase, occurs when a company buys back its own shares from the market. The repurchased shares are either cancelled, reducing the total number of outstanding shares, or held as treasury shares.

There are two main ways companies execute buybacks:

• Tender Offer: The company announces a price it's willing to pay for a specific number of shares. Shareholders can then choose to tender (sell) some or all of their shares at the offered price.

• Open Market Buyback: Following exchange regulations, the company gradually buys its shares in the open market over a specified period.

Why Do Companies Undertake Share Buybacks?

Companies undertake share buybacks for several strategic reasons:

1) Returning Capital to Shareholders: Buybacks provide a way for companies to return surplus cash to shareholders, similar to dividends but often more flexible.

2) Increasing Earnings Per Share (EPS): By reducing the number of outstanding shares, buybacks increase EPS, making the company more attractive to investors.

3) Signaling Confidence: Buybacks signal that the company’s management believes its shares are undervalued and that it has strong future growth prospects.

4) Improving Financial Ratios: By reducing the equity base, buybacks can improve financial ratios such as return on equity (ROE) and return on assets (ROA)

5) Preventing Takeovers: By reducing the number of shares available in the market, buybacks can make it more difficult for potential acquirers to take control of the company.

Indian Companies Utilizing Buybacks

In 2019, Infosys announced a share buyback program worth INR 8,260 crores, repurchasing shares at a premium to the market price. This move aimed to return surplus cash to shareholders and enhance EPS.

TCS conducted a share buyback in 2020, repurchasing shares worth INR 16,000 crores. This buyback demonstrated TCS’s confidence in its business prospects and commitment to returning capital to shareholders.

HUL announced a share buyback in 2010, repurchasing shares worth INR 630 crores. The buyback was part of HUL’s strategy to optimize its capital structure and enhance shareholder value.

Impact of Share Buybacks on Shareholders

1) Increased Share Value: Buybacks reduce the number of outstanding shares, often leading to an increase in the value of the remaining shares.

2) Tax Efficiency: Buybacks can be more tax-efficient for shareholders compared to dividends, as capital gains taxes may be lower than dividend taxes.

3) Enhanced EPS: Reducing the number of shares outstanding increases EPS, potentially making the stock more attractive to investors.

4) Signal of Confidence: Buybacks signal management’s confidence in the company’s future prospects, which can boost investor confidence.

Conclusion

Share buybacks are a strategic tool for companies to return capital to shareholders, enhance EPS, and signal confidence in future growth. By understanding share buybacks, investors can better assess their implications on shareholder value and investment returns.

By incorporating this knowledge into your investment strategy, you can develop a more comprehensive understanding of a company's financial health and its long-term goals. Remember, a well-rounded investor considers not just the current stock price but also the company's future prospects and the potential impact of corporate actions.

So, the next time you encounter news about a stock split, rights issue, or buyback, you'll be armed with the knowledge to assess its potential impact and make informed investment decisions. So, as you bid farewell to this module, remember that the world of finance is a continuous adventure. Embrace the challenges, seek knowledge, and you'll be well-equipped to navigate the ever-evolving financial landscape.