Posted on 21st May 2017
by Vijay Jain
Rated 4.5/5 based on 42 customer reviews
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.
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:
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.
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.
The company either retires the repurchased shares or keeps them as treasury stock available for re-issuance.
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.
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.
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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.
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.
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.
The whole process usually takes about 3 to 6 months after approval of buyback of shares via tender offer by 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 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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