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Understanding share buybacks

Business Standard / 19 Jan 12 | 12:50 AM

With RIL announcing a buyback after seven years, a primer on how it impacts shareholders.

What is it? It is the repurchase of shares by a company from the open market. Companies buy back to raise the value of shares still available (by reducing supply) or to eliminate threats by shareholders looking for controlling stake. Buyback is done when a company feels its share is undervalued. For instance, RIL’s share price fell 35 per cent in one year, whereas the Sensex fell 25 per cent.

Buyback limit: The repurchase of shares in any financial year cannot exceed 25 per cent of its total paid-up capital of that year. All the shares or other specified securities for buyback are fully paid up. Buybacks involve paying cash to shareholders so that the company can cancel stocks.

How it is done: A company can buy shares from free reserves, securities premium account, etc. There are different sources for purchase. Shares can be bought from shareholders on a proportionate basis or through stock exchanges by book-building process, purchasing the securities issued to employees of the company pursuant to a scheme of sweat equity.

Timeline (the process): A public announcement specifies a date to determine the names of the shareholders to whom the letter of offer will be sent. The date of opening of the offer cannot be earlier than seven days or later than 30 after the specified date. The buyback offer remains open for not less than 15 days and not more than 30. A company opting for buyback opens an escrow account.

Objectives: It increases the earning per share (EPS), supports share value, increases promoters' holdings and rationalises the capital structure by writing off capital.

Investor benefit: The return on equity rises, demand can rise, leading to a spike in share price. Though RIL has not made any announcement of the price, if it announces the repurchase at a premium, the share price will rise. Investors can make capital gains in the run-up to the buyback.

Sensex

Company Price Gain (%)
Bajaj Auto2,528.004.76
Hero Motocorp3,117.104.07
Cipla628.453.69
Larsen & Toubro1,559.503.17
Tata Motors516.953.04

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Comments

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    09 Jun 12 at 08:55 PM
By: zagam2

Looking at a single corporation’s cash position and buyback history may be helpful in some respects, but it may actually reveal little about the company’s future prospects. When evaluating potential stock investments, there are many other important factors to consider. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost....thanks VPN service | funny jokes

    19 Jan 12 at 10:06 PM
By: natarajan

Will there be any compeltion on the share holders to give the shares for buy back offer?I hold 100 shares at an average of Rs.1,100..If they buy back now at a price of Rs.900 I may be a loser. If I do not accept the buy back I can keep them for another one year or more and sell at a profit..If iI do not sell at this buy back offer what may be the consequences,will there be any compeltion,or will there be any fall in share price,or any other further buy back offer may come at a lesser rate,or any situation may arise in which that I may not be able to sell the shares kindly give your detailed way outs,guidence,advice, to save our hard earned money.Already RPOWER has made us to invest by their huge advertisement and lost heavily. with regards

    19 Jan 12 at 08:28 PM
By: Gopalakrishnan

For various reasaons some of which may not be attrib utable to the promotors/management, the share prices may go down. In such a scenario the promotors who are confident of their capability to earn for revenue and profit for the company may decide to show theiur confidence by way of buy back of shares from their reseves. My only question is : can the promotors take such decision without getting the nod of all shareholders when the monedy to be spent is from whatever account which belongs to the company and by extension owned by all?