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What is Stocks/Shares Buyback

Share or stock buyback is the practice where companies decide to purchase their own share from their existing shareholders. Usually shares are bought by companies at premium over prevailing market rate of the stock.

Buybacks are done in two ways:
Open market: When companies decide to opt for the open market mechanism to repurchase shares, they can do so through the secondary market.
Tender Offer: In Tender offer, companies provide option to shareholders to surrender their shares by submitting or tendering a portion of their shares within a given period.

Buyback can be looked as a means to reward existing shareholders other than offering timely dividends.

Reasons for Share Buyback?

• When companies have excess cash but do not have enough projects or plans for investment, they prefer to returns the excess cash to shareholders in the form of Buyback or Dividend
• Buyback is a tax-effective rewarding option where shareholders don’t have to pay tax on the returns generated
• Often when the number of shareholders of a company exceeds the manageable limit, it becomes challenging for the companies to reach a decision unanimously. To avoid or aggravate such situations, company board members often resort to share buybacks and plan to consolidate their hold over the company by increasing their voting rights.

Buyback process

• Company informs NSE that Board meeting is called to consider buyback(usually after a week).
• In Board meeting, amount of buyback and buyback price is decided. Usually buyback prices is at premium of 10-30% over previous day closing price of the Stock.
• After board meeting, shareholders approval is asked for. (usually it takes 4-6 weeks time).
• After shareholder approval, company decides Record date (usually 1-4 weeks after shareholders approval). Only those shares that are in shareholders Demat on record date are considered for buyback.
• Based on number of shares in ones Demat on record date, entitlement ratio is arrived. Entitlement is minimum number of shares that will be accepted in buyback for the individual shareholders. For example, for small shareholders in TCS buyback in 2018, entitlement ratio was 44%.
• Buyback window of 2-4 weeks is opened after announcing entitlement. Shareholders may wish to participate or not to participate in the buyback. Shareholder may offer shares upto number of shares on record date in Demat. If shareholder offer upto entitlement quantity, all offered shares will be accepted in buyback. However, if shareholder offer more shares than entitlement, then more shares can be accepted over the entitlement limit based on how many total shares are offered during buyback window. Shares offered during the buyback period are locked until buyback closure.
• Acceptance ratio is calculated based on number of shared offered by shareholders during bayback window. For small shareholders in TCS buyback in 2018, acceptance ratio was 100%.
• After buyback window closure, money is directly credited in shareholders bank account for the number of shares accepted. Usually this is done after 1-2 weeks of buyback window closure. Those shares that are not accepted in the buyback are returned back into the shareholders Demat account.
• All shares bought back by the company during buyback are extinguished, i.e overall shares of the company is reduced by that numbers, resulting in improvement in financial parameters of the company, like Earnings Per Share (EPS) etc.

So, overall, buyback period is usually 10-15 weeks, but it may take even longer. Sebi mandates that buy-back is required to be completed within 12 months from the date of passing the Special Resolution or the Board Resolution.

Typical Example:

Suppose that stock of a company X is trading at Rs 180 before the announcement of buyback plan. You buy 800 shares of the company. Total cost: 180 x 800 = 1,44,000

Before board meeting for buyback consideration, price moves to Rs 200. Company announces buyback at Rs 240. On record date, stock price is Rs 220. Hence, value of shares in Demat on record date: 220 x 800 = 1,76,000 (Total value of shares of company x in your Demat account on record date must be below Rs 2,00,000 on record date to qualify as retail shareholder).

Suppose that entitlement ratio is 40%. You decide to offer all the shares in buyback and 80% shares get accepted. Hence, 80% of 800 i.e 640 shares will be accepted in buyback at Rs 240 each, i.e you get Rs 1,53,000 in buyback for 640 shares.

Assume that post buyback, share price goes down to Rs 200, and you sell rest of your 160 shares at Rs 200, you get Rs 32,000.

Hence, total money received = 1,53,000 + 32,000 = 1,85,000 against investment of Rs 1,44,000. I.e profit of Rs 41,000 in a period of 3 months. Absolute returns would be 28% that translates to annualized returns of 113%.

Hope this article helps you understanding complete buyback process. Please provide your comment on this article.

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