What is Buyback?
A buyback or share repurchase occurs when a company purchases its own shares, leading to a reduction in the overall number of shares available in the market. This strategic move is motivated by various factors. One objective is to enhance the value of the remaining shares by reducing their overall quantity, thereby increasing the individual value of each share. Additionally, companies may opt for buybacks to protect against potential shifts in control by preventing other shareholders from acquiring a substantial stake. Through the repurchase of shares, a company decreases the count of outstanding shares, making it more challenging for any single entity to attain a controlling interest.
What are two types of buyback?
A company can buy back its shares in two ways: by making a tender offer or by purchasing them in the open market. Let us explain both these buybacks to get a better understanding:
Tender Offer:
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How it works: The company announces a specific price at which it wants to buy back its shares. Shareholders can then "tender" their shares for sale at this price, and the company will accept a certain proportion of the shares offered.
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Benefits:
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Guaranteed price: Shareholders are guaranteed to receive the offer price for any shares the company accepts.
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Transparency: The offer price and the acceptance ratio are clearly stated upfront.
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Flexible participation: Shareholders can choose to tender all, some, or none of their shares.
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Drawbacks:
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Uncertainty: Shareholders may not know whether their shares will be accepted until the offer period ends.
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Competition: If more shares are tendered than the company wants to buy, the acceptance ratio will be lower, and some shareholders may not have their shares accepted.
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Funds credited: The buyback amount is credited to the shareholder's primary bank account.
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Additional shares: Clients can apply for more shares than their entitlement, but acceptance depends on the company's acceptance ratio.
Open Market Offer:
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How it works: The company simply buys back its shares on the open market through a broker.
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Benefits:
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Flexibility: The company can adjust its buyback strategy as market conditions change.
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Reduced administrative cost: Open market offers are less expensive to administer than tender offers.
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Drawbacks:
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Market price risk: The company has no control over the price it pays for shares.
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Less transparency: The buyback price can fluctuate during the offer period.
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Limited participation: Shareholders cannot choose to sell a specific number of shares.
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Funds credited: The buyback amount is credited to the shareholder's trading account.
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Buyback period: The buyback period is specified in the offer document and can last for months.
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Tracking buyback: Shareholders can track the buyback progress by visiting the SEBI website.