The term “buyback” carries the exact meaning of it, buyback of repurchase. The buyback is a particular mechanism by which a company buys back its own shares from the shareholders or market. Now, the question is why would a company buy back its own share with their money? This article is all about the concept of buying back of shares. Here, you will get to know What is Buy Back of Shares in India? why the mechanism is needed, how shareholders can get benefited by the mechanism. So, let’s start from the very beginning.
What is Buy Back of Shares in India?
Let’s get into the main topic What is Buy Back of Shares in India? Some of the investors get confused between the concepts of Buy Back of shares and dividend. Though they are almost alike in some perspective, still there are differences between the two. Dividend payments generally contain an implicit promise while buybacks allow a company to reward shareholders without any tactic commitments.
In simple terms, Buyback is a special method which enables a company to purchase back its own shares from the shareholders. The buyback can be done through the open market purchase or through the tender route. In the Open market, the company buys back its own share from the secondary market. On the other side, under the tender offer, investors can tender shares during the buyback offer. Previously, most of the market preferred the open market route.
Now, the question is why a company need such a mechanism? The answers lie below:
The Reason for Buy Back
Generally, the buyback is applied by a company when the company has a significant cash reserve and the shares are undervalued in the market. After a proper analysis, we are able to list down the objectives or reasons for buyback.
- To recover the undervalued stocks
- It helps to improve EPS or Earnings Per Share.
- Other reasons include enhancing the long-term shareholders’ value and providing the additional exit route.
- To get an optimal capital structure.
- To prevent unwanted takeover bids.
- To return surplus cash to its shareholders.
Now, come to the most important point, why would an investor prefer buyback? The answer is given below:
Reasons Investors Prefer Buy Back
The reasons are given below:
Improve Shareholders Value
After buying back its share the company reduce the assets from the balance sheets and increase the return on assets. Hence, this cause reducing the number of shares, as a result of it the EPS increase. Shareholders who are holding the shares, now have a higher percentage of ownership of the company’s shares.
A boost in Share Prices
During the faltering economy, a company’s buyback programme can bring a boost to the particular company’s share price. In order to reflect the value of the company, companies will repurchase first then resell them once the price increase. This also results simplify the supply and demand.
The Tax Benefits
Traditionally, buybacks are taxed at a capital gains tax rate while dividends come under the income tax. When the repurchase program happens, instead of increasing dividend payments, shareholders have the opportunity to differ capital gains.
When the announcement happens about buyback programming, it can be easily assumed that the company has additional cash on hand. So, investors do not need to worry to about cash flow problems. Besides this, investors can guess that the company prefers to reimburse shareholders rather than reinvest in alternative assets.
The Limitation of Buy Backs
Besides advantages, there are several disadvantages also and investors should aware of it. It can be a signal of the marketing topping out. Some companies apply the buyback tricks to boost the share price artificially. Investors can find it by checking the earnings of the particular company. If a company’s earning is not increased but the company buyback values are increasing, it could be a false signal.
So, these are some of the basic points on What is Buy Back of Shares in India?. We will come with more detail information (with reference) on our next topic.