What is Share Buyback: Meaning, Process, Example & How to Apply

A share buyback, also known as a stock repurchase, is a strategic move by a company to buy back its own shares from the open market or directly from shareholders. This process reduces the number of outstanding shares, often leading to an increase in earnings per share (EPS) and a boost in shareholder value. 

Companies undertake buybacks for various reasons, such as returning excess cash to investors, signaling confidence in future growth, or optimizing their financial structure. In this article, we’ll explore the objectives, processes, methods, and benefits of share buybacks, along with practical insights for shareholders looking to participate and how buybacks differ from dividends.

What is a Share Buyback?

A share buyback is a process in which a company repurchases its own stock from shareholders via tender or open market. This buyback decreases the number of shares owned publicly, thereby returning funds to shareholders and increasing the stake owned by remaining shareholders.

Example:

Let us assume a share is trading at 1500 the company announces a buyback for 2000 via tender routhe here the share holder can participate in the share buyback process and apply for share buyback for 2000 the company will take the shares on proportionality basis and transfer the funds to the share bolder.

Objectives of Buyback of Shares

Increase Shareholder Value:

buyback means the company is using its money to buy back some of its own shares from the stock market. When this happens, there are fewer shares available for people to own.

Since the company's earnings (profits) are now spread out over fewer shares, each remaining share is worth a bigger piece of the profit. This results in EPS (earnings per share) going up, even if the company's total profit stays the same.

Return Excess Cash:

If a company is willing to give extra profits to shareholders via corporate actions, buybacks, or dividends instead of using that money to improve the business or invest in new projects or business expansions where that could help it grow, it might not be the best move.

If the company has opportunities to make more money by investing in things like new products and technology or expanding into new markets but instead chooses to give that money to shareholders, it’s like missing out on chances to grow. Shareholders get the money, but the company might not be improving or becoming more valuable in the long run

Signal of Confidence:

Management believes that the stock price can go up because, right now, the stock is undervalued (meaning it's priced lower than it should be based on its true worth). They think the company is not getting the attention or recognition it deserves in the market.

They also expect the company to perform really well in the next few years, with strong growth and earnings. This "robust projection" means they have good predictions or expectations for the company's success going forward.

So, the belief is that because the stock is cheap right now and the future looks promising for the company, the stock price will likely increase.

Improve Financial Ratios:

When a company buys back its own stock called a "buyback", it reduces the number of shares available in the market. This also lowers the total amount of equity listed on the company's balance sheet as well.

Here, "return on equity" (ROE) measures how well a company is using its shareholder's money to make profits. It's calculated by dividing the company’s profit by the total equity.

By reducing the amount of equity through buybacks, the company can make its profit seem higher in comparison (because there's now less equity). This improves the ROE, making the company appear more profitable or efficient at generating returns on its shareholders' investments.

Ownership:

Once the buyback process occurs, the company's ownership percentage will increase, and the outstanding shares will be reduced, and vice versa.

Share Buyback Process

The share Buyback Process involves five steps that include the approval of the buyback

Step 1: Board Approval

• The company’s board of directors will schedule a meeting to discuss the consideration of share buyback for any reason and authorize the buyback.

Step 2: Announcement

• Once the meeting is complete, the company will release a press note disclosing the buyback plan (including the buyback price, timeline, and method(open, tender)).

Step 3, Execution

• Open Market: In an open market, the company directly purchases the shares from the market without the involvement of any retailer's existing holdings. The company buys the free-float shares available in the market.
• Tender Offer: In the tender offer the company fixes the record date and the retailers who hold the shares are eligible for the buybacks, those who are eligible can apply the buyback within the fixed timeline as mentioned in the buyback disclosure

Step 4: Payments

If Shares Accepted:

• The shares which are accepted will get the payment as mentioned timeline directly to the applicant's registered bank account(registered at the time of opening demat account)

If Shares Rejected:

• The shares which you applied for buyback are rejected it will unblock immediately you can sell them in the open market

Step 5: Reporting

• The company updates regulators and shareholders on the completion of the buyback plan on certain details like the entitlement ratio.

Methods of Buyback of Shares

• Open Market Purchase: Buying shares from the stock exchange over time at prevailing market prices.
• Tender Offer: Offering shareholders a specific price (usually a premium) to sell their shares back within a set period.
• Private Negotiation: Directly negotiating with large shareholders to repurchase shares.
• Dutch Auction: Shareholders specify the price at which they’re willing to sell, and the company buys at the lowest price that meets its target.

Buyback of Shares Rules

In India, the market regulator SEBI came up with certain regulations for the buybacks of the companies to ensure transparency for the investors.

• Authorization: Must be approved by the board and sometimes shareholders.
• Funding: Typically funded from profits, reserves, or excess cash.
• Limit: A cap on the buybacks that once a company issued a buyback again, it was not eligible for another buyback for a minimum of one year.
• Disclosure: Public announcement and reporting to regulators.
• Cooling-off Period: Restrictions on subsequent buybacks or insider trading during the process.

Share Buyback Benefits

• Higher EPS: Fewer shares mean earnings are spread over a smaller base.
• Stock Price Support: Demand from buybacks can lift the share price due to investors getting high returns in shore time.

Advantages of Buyback of Shares

• Boosts investor confidence in the company’s future.
• Efficiently uses excess cash rather than hoarding it.
• Reduces the risk of takeover by consolidating ownership.
• Offers shareholders an exit option at a premium (in tender offers).

Conditions for Buyback of Shares

• The company must have sufficient free reserves or cash.
• It must comply with legal limits (not exceeding 25% of paid-up capital and free reserves).
• The buyback must not impair the company’s ability to operate or meet debt obligations.
• Regulatory approval will be required depending on the terms and conditions.

How to Apply for Buyback of Shares (as a Shareholder)

Check Announcement: Look for the company’s public buyback notice (e.g., tender offer details).

Eligibility: Confirm you hold shares before the record date.

Submit Application: For tender offers, submit a form to the company or broker with the number of shares you wish to sell.

Acceptance: The company accepts shares based on the offer terms (pro-rata basis if oversubscribed).

Payment: Receive payment after shares are transferred.

For open market buybacks, you simply sell shares on the exchange as usual.

Difference Between Dividend and Share Buyback

• Nature: Dividends are cash payments; buybacks repurchase shares.
• Taxation: Both have the same tax implications.
• Frequency: Dividends are often regular; buybacks are one-time in a year.
• Impact: Dividends don’t affect share count. They cause the share price to fall by the same dividend amount as the amount reduced from the books, where buybacks affect the reduction of outstanding shares.
• Choice: Dividends go to all shareholders without any application, unlike buybacks, which allow shareholders to opt in or out.

Conclusion

Buybacks are the best opportunity for retail investors who want to make a quick return. Investors can follow this strategy of applying buybacks and again purchasing shares with the profit amount to increase their share count.

Related Articles:
1. What are Dividend Stocks? Definition, Types of Dividend Stocks