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Buyback offers and what do they mean for investors, explained

In simple terms, buyback refers to the practice of a company buying back its own shares from the market. It can do so in two ways – open market route where the shares are purchased from the secondary markets or tender offer route wherein shareholders can tender their shares in the offer.

April 16, 2021 / 02:55 PM IST

Infosys said it will buy back shares worth Rs 9,200 crore at a maximum price of Rs 1,750 per share. What is a buyback offer, what is it in for companies, and what does it mean for investors? All the key questions answered below.

Technology company Infosys said it will buy back shares worth Rs 9,200 crore at a maximum price of Rs 1,750 per share. That is nearly 30 percent higher than the current market price. If you are wondering what is this fuss about a buyback offer and how does it benefit investors and companies, here is an explainer.

What is a buyback offer?

In simple terms, buyback refers to the practice of a company buying back its own shares from the market. It can do so in two ways – open market route where the shares are purchased from the secondary markets or tender offer route wherein shareholders can tender their shares in the offer.

Buybacks are looked upon as a way to reward shareholders or improve the company financials as typically a buyback offer improves the financial ratios of the company and leads to better valuations. It is also considered a sign of increased confidence from the promoters whose stake in the company rises post a buyback as the shares that are tendered or bought are extinguished i.e., the total number of outstanding equity shares fall.

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How do investors gain from a buyback offer?

Stock markets generally view buyback offers in a positive manner. As mentioned, it is believed that promoters who have confidence or are positive about the long-term prospects of the company opt for buybacks. There is empirical evidence that shows that stock prices have moved up post a buyback offer. In terms of valuations as well, buybacks lead to an improvement as important ratios like earnings per share (EPS), return on capital and return on net worth improve post a buyback.

More importantly, shareholders stand to gain irrespective of whether the company opts for tender route or open market purchase. Also, since buybacks are made at a price higher than the market price, the offer price becomes the benchmark in many ways. In the case of Infosys, the buyback offer price is nearly 29 percent higher than its current market price.

How do companies gain from buyback?

Promoters are able to strengthen their hold on the company as the total number of outstanding shares dip post a buyback. This assumes significance, especially, if the company faces a hostile takeover bid. It also makes the company more popular among the investor community as buyback is a more tax-efficient manner of rewarding shareholders when compared to dividends that are taxed at three levels.

Buyback is also a quick and easy way to reduce the capital of the company, which in ordinary course of business requires an approval from the National Company Law Tribunal (NCLT). Companies can also use a buyback offer to support the stock price during bearish or extremely volatile market conditions.

Why do markets look at buyback as a positive development?

Apart from some of the reasons mentioned above that improve the company’s financials while rewarding shareholders, buybacks are a way to utilise surplus cash of the firm. Shareholder funds are treated as a liability and any reduction in the fund only lowers the overall liabilities of the listed entity while making its balance sheet stronger.

This becomes all the more important during times when there are no acquisition opportunities or a better way to utilise the surplus funds. Not surprisingly, more than 10 buyback offers are currently on including that of HPCL, Jagran Prakashan, NIIT, Rane Braking, Aarti Drugs and Gujarat Apollo Industries, according to data from Prime Database.

Its popularity can be further gauged from the fact that 2020-21 saw a total of 61 buyback offers cumulatively worth nearly Rs 35,000 crore, which was nearly double that of the previous fiscal. Further, the first three months of the current calendar year has already seen 16 offers worth over Rs 2,000 crore.

How will Infosys shareholders gain from the buyback offer?

Infosys has opted for the open market route and would be buying a maximum of nearly 5.3 crore equity shares that constitute 1.23 percent of the paid-up capital of the company. In other words, existing shareholders cannot directly tender their shares in the offer in which the company would buy shares at a maximum price of Rs 1,750.

But shareholders will be the indirect beneficiary of the offer as there is a likelihood of a buyer – Infosys - in the market who is ready to offer up to Rs 1,750 for each share of the company. These sentiments typically push up the stock prices, which, in turn, benefit the shareholders.

The ‘Buyback Committee’ of the company would decide on the manner and frequency at which the shares have to be bought back from the market. The price at which the company buys the shares would fluctuate depending on the market price and demand-supply gap among other things. Incidentally, details regarding the total number of shares bought etc are made available on the stock exchange website.
Ashish Rukhaiyar is a financial journalist
first published: Apr 16, 2021 02:55 pm

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