How can Retail Investor get benefit from Buyback

Posted on 21st May 2017
by Vijay Jain


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You might have heard of term “Buyback” recently due to its gaining popularity after announcements of buy back by IT majors like Cognizant, TCS, Wipro, Infosys. Weather you are a long term investor in the company or planning to buy shares for short term to participate in buyback, you can make a decent return in both the cases.

Anyone who is holding the stock for long term and have net holding of Rs 2 lakh, buyback makes lot of sense. If you are someone who is planning to buy shares now, then buyback leaves you with good return in around 3 month time ( times it take to complete the buyback through tender offer). In Buyback with tender offer – registrar decide depend on volume of buyback how much % of your share will be bought back. If 100% of shares are not bought back, then also you will get a good return but bit lower. Also you will have to pay 15% short term tax if you are buying shares now and selling before a year.

In this article we would like to tell you all about the buyback offer, how it works, how to offer shares in buyback and benefit of buyback to retail short term and long term investor and also try to answer all your questions related to buyback. The main focus of this article is make short term investor aware about the buyback process in general and how he can make profit out of it.

What is Buyback of stocks means?

When company repurchases its outstanding shares from open market by either of the two ways- tender offer or through open market, this process is called stock buyback or share buyback. It is also known as Share Repurchase. The company usually buys its own outstanding stocks or outstanding equity from the existing shareholders in exchange of the cash. Such transactions are legal and generally monitored by SEBI. Buyback has 15% reserved for retail investor with less that 2 lakh worth of holding and 85% for non retails investor which includes promoters, MF, FII, DII etc.

Buybacks can be carried out in two ways:

Tender Offer Buyback

    In this process, shareholders are presented with a tender offer where they have the option to submit or tender a portion or all of their shares within a given time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. In tender offer, these three things are pre-specified:

    • Buyback Price
    • Duration of the offer
    • Number of shares sought by company

    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 basis to all who tendered at the purchase price. This is called as proportionate buyback. If the number of shares tendered is below the number sought, the company may choose to extend the offer’s expiration date.

Open Market Buyback

    In this process, the company buy back shares up to a certain number not necessarily the whole announced quantity through the open market over an extended period of time and may even have an outlined share repurchase program that buys back shares at certain times or at regular intervals. Maximum price is fixed and the buyback can be done upto or below that particular price, not beyond.

How much portion of buyback shares can be brought back from retail investors?

15 % of the buyback shares are bought back from retail investors and 85% is reserved for non retails investor which includes promoters, MF, FII, DII etc. In most of the recent buybacks, retail portion in undersubscribed, leading to 100% acceptance ratio.

Key reasons for buyback of shares by the company:

  • It reduces the number of shares held by the public thus the earnings per share increases even if profit of the company remains the same.
  • It supports the share price during periods of sluggish market conditions.
  • Buyback helps to take advantage of undervaluation. The company repurchase the currently undervalued shares, wait for the market to correct the undervaluation whereby prices increase to the intrinsic value of the equity, and re-issue them at a profit.
  • Share Buyback helps reducing the cost of capital. Buying back some or all of the outstanding shares can be a simple way to pay off investors and reduce the overallcost of capital instead of paying the dividends which is a cost of equity.
  • Companies also more readily repurchase shares at a profit when the stock is liquidly traded and the companies' activity is less likely to move the share
  • Share repurchases also allow companies to distribute their earnings to investors without inflicting them with taxation.
  • Share repurchases avoid the accumulation of excessive amounts of cash in the corporation.

What the company do with the buyback shares?

The company either retires the repurchased shares or keeps them as treasury stock available for re-issuance.

Buybacks vs. dividend payments – Which one is good for shareholders?

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 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. Executive which are rewarded the stock options doesn’t get 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.

How can retail investor get benefit from buyback?

Buyback would lead short term or long term gain depending upon what type of investor you are.

Long term investor

    Long term investor can sell their holding via tender offer and in cash the profit from this opportunity when company is buying shares at higher prices. If you have shares lying in your account for more than a year then the long-term capital gains generated from buy back will be tax-free same as selling long term holdings in open market.

Short term investor

    Short-term investors can make quick money by making a fresh position right before a scheduled buyback. Short term investor can start accumulating stocks when buyback is announce/approve by the company. Retail Investors are allowed to tender max of Rs 2 lacs in buyback process. Usually buyback price of stock is 10 to 15% higher than the market price. Still you need to carefully consider the offer price before tendering your shares under buybacks, because you stand to gain only if the buyback offer price is significantly higher than the prevailing market price and the quantum of the buyback amount is substantial. Remember you need to pay 15% tax on the short term capital gain.

Example: TCS recently announced buyback when stock price of TCS was 2350 Rs per share and the buyback offer price was 2850 Rs, in this example if you are holding TCS shares or able to accumulate TCS share worth of INR 2 Lacs in your account on and before offer date, depend on buyback quantity approved by registrar you can get Rs 500 per share. Sometimes, due to oversubscription, there is a chance that only 50% or 30% of your shares would be buyback and you would be holding the rest. There is a little chance of this happening but we want you to know the risk before taking any decision of whether you should go ahead with the buyback.

There is flip side of buyback when market price of stock is higher than offer price, in such case selling the stock in market rather than tendering it for buyback will be beneficial for investor.

Key steps and dates in a Buyback Process:

  • Board Meeting approves the proposal of buyback : This is company’s internal meeting where board of directors pass a resolution for buyback of shares.
  • Public announcement for Buyback: Company officially makes a public announcement of all the material information within two working days from the date of resolution in at least one English National Daily, one Hindi National Daily and a Regional language daily.
  • Copy of public announcement is submitted to SEBI.
  • Record Date for determining the Buyback Entitlement and the names of Eligible Shareholders: A company making a buyback offer, announce a record date for the purpose of determining the entitlement and the names of the security holders, who are eligible to participate in the proposed buyback offer. It is especially important for short term gainers to buy and keep the company shares in their demat account by or before this date. Only the stocks which are available in investors account on record date will be eligible for buyback process.
  • Post record date, Registrar validate the entity of holding in demat account and communicate to respective holders about the number of shares eligibility and other process. The offer for sale and tender forms will then be available online on your broker’s website.
  • Date of Opening of the Buyback Offer: Investors are allowed to submit the tender form within the period of opening and closing of the buyback offer. The offer for buy back usually remain open for a period of ten working days. You can submit the form online through your broker’s website ( ICICI Direct, Zerodha, ProStocks) or call your broker to place your holding under OFS. If investor doesn’t want to participate in buyback offer, no action is requires and their holding is safe in demat account and can be sold in open market.
  • Date of Closing of the Buyback Offer: This is the last date to participate in buyback process. If you buy shares immediately after the buyback announcement, and the buyback price is not much higher than the prevailing price, you won’t benefit, since you will also have to pay short-term capital gains tax of 15%. Carefully consider the offer price before tendering your shares under buybacks, because you stand to gain only if the buyback offer price is significantly higher than the prevailing market price and the quantum of the buyback amount is substantial.
    There are chances when big buyback offer start and investor start locking their holding with Registrar for buyback offer, market start reacting in positive direction and stock price move above the buyback price, in such case it is better to sell your holding in open market. Usually smart investors wait until closing dated before deciding to sell in buyback process or open market.
  • Last date to receive the completed tender forms and other specified documents including physical equity share certificates by the Registrar.
  • Last date of verification of tender forms by the Registrar : This is process related step carried by Registrar.
  • Last date of intimation to the Stock Exchange regarding acceptance / non- acceptance of tendered Equity Shares by the Registrar.
  • Last date of settlement of bids on the Stock Exchanges: Registrar get final approval from exchange.
  • Last date of payment to shareholders/ dispatch of unaccepted share certificate(s) by the Registrar/ return of unaccepted demat shares by Stock Exchanges to Shareholder Broker/ Eligible Shareholders.
  • Last date of extinguishment of Equity Shares bought back.

When to invest in buyback scripts?

When company announce 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 make sense to invest money in buyback offers.

How to offer shares for buyback?

In 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. 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 buy back. If chosen by the company, the shares will be bought back.

With discount brokers like ProStocks, Zerodha, Upstox etc you need to call and request to place your buyback offer.

What is proportionate buyback for retail investors?

When a company announces the number of shares they want to buy back, Of which 15% is only bought back from small investors with less that 2 lakh worth of holding. But as lot of people who are aware of buyback offer, many retail investors start accumulating shares of the company before the buyback date in announced. So it is a possibility that number of share held by small investor could be more than 15%. In such case, due to oversubscription of shares, proportionate buy back happens. So there are chances that only 50% or 30% would be brought back and you would end up holding the rest.

How much time buyback process takes in tender offer?

The whole process usually takes about 3 to 6 months after approval of buyback of shares via tender offer by board of directors.

How long will it take to receive money in my account after submitting the buyback form?

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.

Is there any brokerage charges I have to pay for tendering the shares for buyback?

Unlike IPOs, there is 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 no shares brought back by the company. You will receive the money in your account minus the brokerages 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.

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User Comments

avatar
2. Rajesh  May 22, 2017 12:41:30 AM IST Reply
HCL Technologies buyback - 1000 Rs per share, Current market price 844 Rs, Record date - 25th May 2017. Stock must be in your detat account by 25th.Last chance to buy script on Monday 21st 2017 to participate in Buyback offer.

Happy Investing.
avatar
1. M R THIPPESWAMY  Jul 30, 2017 12:18:58 PM IST Reply
sir,
Will you pl give details about open market share buyback as is announced by justdial share buyback in open market.
1. Is there any offer for small investors as in tender offer method?
2. Is there any record date for open market share buyback?
thanking u

M R THIPPESWAMY

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