What is Share Buyback?
Share buyback occurs when a company buys back shares from existing shareholders. This is normally done through a tender offer or open market transaction.
Why Do Companies Do Share Buybacks?
Ever wondered why all of a sudden, firms start buying their shares as if there is no tomorrow? Well, wonder no more as we get into the invigorating realm of share buyback and understand what this financial shuffle is all about that set Indian markets abuzz.
What's a Share Buyback, Anyway?
Share buyback can be simply defined as a process in which a company buys back its shares from a stock market. Simply consider a company to be a cricket team. A company calls back its shares quite analogous to a situation wherein a team might call back its star players. These shares are either retained by the firm or even canceled, which of course reduces the total number of shares available in the market.
A share buyback is also termed as share repurchase.
Why do Indian Companies Go for Buyback?
Well, here is the reason why share buyback is making the rounds:
- Enhancing Shareholder Value: After buying back the shares, companies increase their EPS, which hikes up the stock price of each share. It's like getting more bang for your buck!
- Return of Excess Cash: Given that some companies hold significantly more cash than needed, buybacks are a way of rewarding shareholders without making a commitment to regular payouts.
- Showing of Confidence: Buybacks indicate that the management of a company feels its stock is undervalued, or it is a way of saying, "We believe in our future, so should you!
- Takeover Defense: The company may repurchase shares with the executive motive of preventing the sale of the shares at the time of takeover. It is an activity wherein a firm may buy back shares as.
Indian Examples in Action
- Tata Consultancy Services (TCS) has been a part of this buyback game for a long time. In the year 2023, TCS came up with a buyback of ₹18,000 crore. This is another strategic way to use the excess cash and add value for its shareholders. This shall ensure that the company has healthy financial results and strong commitment to its shareholders.
- In the year 2022, Infosys announced a share buyback of ₹9,200 crore with the objective of returning value to its shareholders and optimizing the capital structure of the company. The buyback by Infosys was based on confidence in its continuous growth and profitability.
How Does This Impact the Shareholder?
Share buybacks can be a win-win.
- With fewer shares in circulation, the value of each share can increase. It is like watching your investment grow before your eyes!
- Fewer shares outstanding mean you own a progressively larger percentage of the broader enterprise. Your stake starts to mean something.
- With more propensity for share buybacks, the future means that companies could now be paying out dividends in great proportions, which is yet another benefit that can accrue from share buybacks.
Imagine you are a shareholder of ABC Ltd., which is one of the biggest and most successful technology companies in India. The management declared a buyback program of ₹1,000 crores to buy back 10% of the shares of the company. The company buys back 10 crore shares from the 100 crore shares issued. The number of outstanding shares changes now to 90 crore. Obviously, this reduction in outstanding shares will increase the EPS and further make the remaining shares more valuable. Before the buyback, 1,000 shares of yours that were worth ₹1,00,000 now, with the stock rising from ₹100 to ₹120 post-buyback, this very investment grows to ₹1,20,000.
Notice how, in this example, share buybacks can boost shareholder value and improve your returns.
Beyond all these financial jargon, share buybacks reflect a strategically inclined move by the company and an immense amount of confidence displayed in the future. Buybacks not just help the Indian investor understand the game better, but also keep abreast of the important decisions an investor needs to make for their portfolio. Hence read the fine print and stay alert with the buybacks because it might just be the golden opportunity to boost your portfolio.
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