What’s a buyback of shares?
A buyback is a scheme by which a company repurchases a certain amount of its outstanding shares. Once taken back, these shares are extinguished by the company.
A buyback is a scheme by which a company repurchases a certain amount of its outstanding shares. Once taken back, these shares are extinguished by the company.
Typically, companies that have excess cash in their kitty, with no specific investment or other deployment requirements for the same, may consider buybacks. Reducing the number of shares in this case helps in improving the earnings per share for continuing shareholders and perks up the return on equity.
Buyback of share from the public can also be done if promoters want to hike their stake in the company, sometimes to avoid any takeover threats.
Buybacks can be done either through the tender offer route or through open market purchases. In the former, the company fixes a buyback price and accepts shares on a proportionate basis during the buyback period.
Shareholders will be sent a letter of offer; a form is to be filled in with the necessary details and sent back to the company accompanied by the required documents. Promoters are allowed to tender their shares in this route.
Under open market purchases, the company specifies a maximum price and buys back shares from the market during a defined time period. Promoters cannot take part in this route.
The decision of a shareholder to participate in a buyback is based on a number of variables specific to the stock — such as the buyback price, the number of shares that can be sold and the prospects for a company. Investors need to take note of three factors before they take the plunge
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