Buyback & how it’s done

THE TERM literally refers to a company’s move to repurchase its own shares. By doing so, the company reduces the number of its shares available in the open market.

This will lead to the rise of earnings per share (EPS) and the return on assets of the company, indicators on the balance sheet of an improvement in the performance of the company. As an investor, it will mean an increase in his/her stake in the company. A stock buyback is also sometimes referred to as share purchase and it is generally considered to signal a potential increase in share price.

How is it done?

A company can buy back shares either using tender offer or in an open market buyback. Under the first method, the company issues a tender offer with details regarding the number of shares that the company plans to repurchase and indicates their price range.

An investor keen on accepting the offer needs to fill the form mentioning the number of shares that he/she wants to tender and the price desired and send it back to the company. In most cases, the price in a tender offer buyback is higher than the price in the open market.

According to Sebi guidelines, if the company has decided to accept your shares, then it needs to intimate you in 15 days after the closure of the offer. The other route available for company is where they slowly buy back their shares from the open market.

Where can you find out?

Details regarding buybacks are available from the stock exchange as it is mandatory for the companies to intimate them of such resolutions. Details of a buyback offer are also available on the Sebi website.

Why are companies currently going for a buyback?

There are multiple reasons. Sometimes, companies generally indulge in a buyback when they feel that their share price in the market has fallen drastically.

At other times, it may simply be a way of using excess cash. However, there are also cases when this may be an attempt at preventing a takeover of the company.