Share Buyback is a unique process through which companies repurchase their own shares from the shareholders. In this article we will discuss the meaning of share buyback, reasons for share buyback and how to make risk-free profit through a share buyback.
What is Share Buyback?
Share buyback or stock buyback is when companies buy back their own shares from shareholders including retail investors, promotors, institutional investors and foreign institutional investors. Share buyback is covered under section 68 of the Companies Act, 2013.
Why do Companies Initiate Share Buyback?
Companies initiate share buybacks to avoid holding excessive cash reserves. Excess cash doesn’t look good on a balance sheet for a simple reason: Investors invest their hard-earned money in a company so that it can be used productively to earn high returns.
If the company starts to retain surplus cash instead of investing in new projects, then that money is better off with a bank that too at zero risk!
Therefore, instead of sitting idly on cash, companies prefer to either distribute it in the form of dividends or initiate share buyback.
But a share buyback is not always positive. In some cases companies announce share buyback to simply manipulate the stock prices. Some common reasons for share buyback include:
- Excessive cash reserves with the company.
- No substantial new long-term projects or avenues for deploying surplus cash.
- Raising promoter holding % in the company.
- Manipulating stock prices.
- Inflating ‘return on asset’ ratios and key company ratios
You can see the below video to understand (in detail) how companies manipulate key performance ratios through a share buyback.
Methods of Share Buyback
Companies can initiate share buyback via 2 methods:
- Tender Offer Share Buyback
- Open Market Share Buyback
In a tender offer, companies buy back shares directly from investors on a one-to-one basis at a fixed price. Whereas in open market share buyback, companies initiate buy back of shares through the stock market.
Share Buybacks in 2020: Find the list of latest share buybacks in India in 2020.
|Company||Buyback Type||Buyback Price||Record Date|
|TCS||Tender Offer||Rs 3,000||28.11.2020|
|Wipro Ltd||Tender Offer||Rs 400||11.12.2020|
|NMDC Limited||Tender Offer||Rs 105||23.11.2020|
|NTPC Ltd||Tender Offer||Rs 115||13.11.2020|
|Ajanta Pharma Ltd||Tender Offer||Rs 1,850||13.11.2020|
How to Make Risk-Free Profit in a Share Buyback?
Share buybacks are an excellent way to make risk-free profits in the stock markets. Let us look at how you can make risk-free profit in a share buyback.
Assume that a company ABC Ltd is trading at Rs 500/share and has announced that it will buyback its shares at Rs 750/share. To make risk free profit in this deal, you simply need to buy the stock at Rs 500 from the stock market, hold it till the record date (explained in the video) and sell it back to the company at Rs 750/share. This way, you make a risk-free profit of Rs 250 per share.
But a big roadblock in this strategy is the ‘acceptance ratio’. Acceptance ratio is the % of shares that the company will buy back from a particular investor. So, if you hold 10 shares of ABC Ltd, the company might just buy back 5 shares from you. Hence it is recommended to subscribe to buybacks of good companies so that even if your shares aren’t accepted, you can still hold them for the long-term.
How to invest in a Share Buyback?
A stockbroker is the main entity through which retail investors can participate in share buybacks. Subscribing to a share buyback through traditional brokers is a very cumbersome process as investors have to fill a gazillion forms and provide supporting documents etc.
But with Samco, you can simply raise a request in the Samco back office and post verification, Samco will bid in the share buyback process for you.
In the coming months, the market is going to be flooded with share buybacks and to make risk-free profits in share buyback, you need a trading companion. Well, look no further as Samco has been awarded as the best equity stock broker in India by CNBC – Awaaz. Open a 3-in-1 Samco Demat account today and start creating wealth through share buybacks!
Very useful article on share buybacks… Would appreciate if you could guide us about the difference between the tender offer and the open market route as well
Thank you very much for the feedback! Also, we’ll look into your suggestions & try to incorporate them in our future articles.