Is Share Buyback a good or bad investment decision?
What is Share Buyback?
Share or Stock buyback refers to repurchasing of shares of stock by the company that issued them. A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.
With stock buybacks, the company can purchase the stock on the open market or from its shareholders directly. In recent decades, share buybacks have overtaken dividends as a preferred way to return cash to shareholders. Though smaller companies may choose to exercise buybacks, blue-chip companies are much more likely to do so because of the cost involved.
Types of Buybacks
There are two types of buybacks; Tender and Open market. The open market route is where the shares are purchased from the secondary markets while the tender offer route is where shareholders can tender their shares in the offer.
Reasons for Share Buyback
Since companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back. However, there are numerous reasons why it may be beneficial to a company to repurchase its shares, including ownership consolidation, undervaluation, boosting its key financial ratios and cost-efficiency.
How to apply for Buyback of shares?
If you intend to buy stocks for buyback, the same needs to be bought using normal or delivery product type. Stocks held in Margin Trading (MTF) account will not be eligible for buyback. If stocks are bought in MTF then the funding needs to be cleared on T-2 days before the record date to be eligible in the buyback. For eligibility in the retail category, the value of stock holdings needs to be less than Rs 2 lakh.
What happens next...
If you meet the criteria above, you will receive an email for a buyback of shares in case of tender buyback. You will have to login into your broker account and bid for the eligible quantity and submit it. Funds payout for buyback issue will be directly credited by the exchange in the respective bank account of the customer. The remaining shares which were not correctly submitted get credited back to your Demat account.
In the case of Open market buyback, the company opts to buy back its shares by actively buying from sellers on the exchange platform. The company mentions the period of buyback in the buyback offer. These buybacks usually last for months as the company has to ensure that there isn't significant price appreciation due to its buying activity. An investor would receive a mail if the shares sold by him are purchased by the company.