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In today’s time, shares buyback is gaining popularity especially after the major IT companies like TCS, Wipro, and Infosys announces share buyback. Share Buyback is simply means repurchasing company’s own shares from investors. But the question here is why do companies tend to repurchase its own shares, how does buyback works, are there any eligibility criteria to apply for buyback, and how to apply for shares buyback.
Let’s talk about everything in detail in this article.
When a company decides to repurchase its outstanding shares from the market it is called stock buyback or shares buyback. As shares are repurchased by companies which reduces the number of outstanding shares available in the hand of investors.
An issuer company generally purchases back its shares from existing shareholders at a premium over the share’s current market price. As the buyback price is set at a higher price than the market price which encourages investors to apply for the buyback process.
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There are two methods of buyback that a company can choose to acquire shares from existing shareholders – Tender offer and Open market offer.
Let’s understand each of the buyback methods;
When a company is willing to announce buyback of shares from existing investors at a certain fixed offer price is called tender offer buyback. Company who makes buyback offer issues a tender form to all eligible investors on the buyback record date. All the buyback details including buyback price, duration, and number of buyback shares company purposes to repurchase are clearly mentioned in the tender offer.
All eligible shareholders as on the buyback record date can participate in the tender offer buyback to tender or sell their shares at the buyback price. The offer price in tender route is set at a premium to the current market price to compensate investors for selling them rather than holding them.
Tender offer buyback remains open for few days. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at the purchase price on a pro rata (proportionate) basis to all who tendered at the purchase price. This is called as proportionate buyback.
In this type of shares buyback, a company purchase shares directly from the open market. There are two mechanisms of open market buyback – stock exchange and book-building.
In the stock exchange mechanism, company purchases shares directly from sellers on the exchange. Existing shareholders can simply place a sell order on exchange and if your order gets matched, shares will be buyback by the company. Any shareholder can participate in the open market buyback through stock exchange. Only promoters cannot participate in such buyback offer.
Second is the buyback through book-building process, wherein the buyback issuer company appoints a merchant banker to set buyback offer price based on the bid received from shareholders on the electronic bidding centers.
Open market buyback can lasts for few months and there is no concept of record date or proportionate basis allotment. The company only announces the maximum buyback offer price and it has flexibility to repurchase shares at any price upto the maximum price.
After knowing what buyback is, you must be willing to know that why do companies repurchase their own shares from market.
Undoubtedly, there are certain eligibility criteria predefined by SEBI to apply for shares buyback. If you want to apply for buyback of shares, you must check whether you meet the following conditions or not to be an eligible shareholders.
If you are an eligible shareholder, you can apply for buyback of shares online through your stockbroker. You can directly tender your demat account holdings for buyback through broker’s trading platform. One can apply for the buyback during the buyback period only.
Check out the steps on how to participate in the buyback offer;
Note: Once shares are tendered then company decides an acceptance ratio which is the likelihood of how much of applied or tendered shares will be accepted for buyback. Any number of shares over and above the acceptance ratio, will be credited back to the applicant’s demat account.
If in case retail category for buyback receives less subscription than 15% means company may have 100% acceptance ratio and all the tendered shares by retail investors will be approved for buy back.
Whether buyback of shares by a company is good or bad depends on multiple facets. Like if a company has solid growth prospectus and investors have risk appetite too then shareholders may stay invested in the company to get more profits by holding it. Unlikely, if you have low risk appetite and just want to make some returns by selling shares, you may consider tendering of shares for the buyback to get 10%-15% of premium over the prevailing market price.
The choice is ultimately yours whether to stay invested in the company or offloads the holdings over some premium.
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Both dividend and buyback are the ways company reward or pay back to its shareholders.
When it's come to dividend, its make the market expectation that the company will try to maintain or raise the dividend over time, however buybacks is one kind of reward for shareholders without committing the repeating nature.
Buybacks can also be more profitable for corporate executives than dividends. Executives which are rewarded the stock options doesn't get a dividend, but they can benefit from a buyback that pushes up the near-term or long-term stock price.
Buybacks can also be rewarding to shareholders if the company's stock is undervalued. But if the stock is overvalued, buybacks can be a waste of money.
When the company announces buy back offer, that is the best time to start accumulating shares in your demat account. The buyback price is predetermined at the time of announcement. If the buyback price is 10 to 15% higher than the market price, then only it makes sense to invest money in buyback offers.
In the tender offer for buyback, shareholders are required to tender the shares to participate. You can offer shares for buyback through your online trading account or alternatively by call n trade. An investor can apply for buyback of shares online through Online Stock Brokers like ICICI Direct, Share Khan, and Angel Broking etc. For this, login to your trading account, navigate to IPO option. If the company has already announced buy back and has initiated the process, then you will see the name of the company there. If not, wait for the option to appear. When you see the company name, click on GO and enter the number of shares you like to surrender for buyback. If chosen by the company, the shares will be bought back.
With discount brokers like ProStocks, Upstox, SAMCO etc, you need to call and request to place your buyback offer. Zerodha is the first discount broker who started online buyback tender form. So you dont need to call Zerodha customer support team. You can tender your buyback request on Zerodha Consol by your own.
The whole process usually takes about 3 to 6 months after approval of buyback of shares via tender offer by the board of directors.
It takes up to 4-6 weeks to receive money in your account. First, you will get a confirmation email from the registrar regarding the acceptance of shares for buyback before receiving money.
Unlike IPOs, there are brokerage charges applied on the shares brought back by the company. Also, there will be demat charges for outgoing of shares from your demat account. However, there is no brokerage charge for tendering the shares, but if your shares are brought back by the company then the brokerage charges will be applied on the number shares brought back by the company. You will receive the money in your account minus the brokerage charges and other tax. Shares not bought back by the company will be refunded back to your demat account. It is better to check with your broker for all the brokerage charges and tax before applying in buyback.