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Shares Buyback Meaning, Methods, Eligibility criteria, and How to Apply

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Everything you need to know about Shares Buyback

In today’s time, shares buyback is gaining popularity especially after the major IT companies like TCS, Wipro, and Infosys announces share buyback. Share Buyback is simply means repurchasing company’s own shares from investors. But the question here is why do companies tend to repurchase its own shares, how does buyback works, are there any eligibility criteria to apply for buyback, and how to apply for shares buyback.

Let’s talk about everything in detail in this article.

What is Shares Buyback: Meaning?

When a company decides to repurchase its outstanding shares from the market it is called stock buyback or shares buyback. As shares are repurchased by companies which reduces the number of outstanding shares available in the hand of investors.

An issuer company generally purchases back its shares from existing shareholders at a premium over the share’s current market price. As the buyback price is set at a higher price than the market price which encourages investors to apply for the buyback process.

Click here to know upcoming Buyback offers

Important Conditions for Shares Buyback

  • A company can repurchase maximum 25% of its paid-up equity share capital through announcing share buyback.
  • 15% of buyback offer is reserved for retail investors holding investment worth less than Rs 2 lakh in their Demat account.
  • Rest 85% of the buyback offer or issue size is reserved for non-retail category of investors including FIIs, DIIs, Mutual funds, and promoters.
  • Post buyback offer, the maximum permissible debt to equity ratio should be within 2:1.
  • A company can announce buyback of upto 10% of total paid-up equity capital + reserves by passing board resolution.
  • If the size of buyback is upto 25% of total equity paid-up capital + reserves, special resolution is required to make the buyback offer.
  • A company can utilize its free reserves, securities premium account, or proceeds from issue of other specified securities to buy back shares from investors.

Methods of Shares Buyback

There are two methods of buyback that a company can choose to acquire shares from existing shareholders – Tender offer and Open market offer.

Let’s understand each of the buyback methods;

1. Shares buyback through tender offer

When a company is willing to announce buyback of shares from existing investors at a certain fixed offer price is called tender offer buyback.  Company who makes buyback offer issues a tender form to all eligible investors on the buyback record date. All the buyback details including buyback price, duration, and number of buyback shares company purposes to repurchase are clearly mentioned in the tender offer.

All eligible shareholders as on the buyback record date can participate in the tender offer buyback to tender or sell their shares at the buyback price. The offer price in tender route is set at a premium to the current market price to compensate investors for selling them rather than holding them.

Tender offer buyback remains open for few days. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at the purchase price on a pro rata (proportionate) basis to all who tendered at the purchase price. This is called as proportionate buyback.

2. Shares buyback through open market offer

In this type of shares buyback, a company purchase shares directly from the open market. There are two mechanisms of open market buyback – stock exchange and book-building.

In the stock exchange mechanism, company purchases shares directly from sellers on the exchange. Existing shareholders can simply place a sell order on exchange and if your order gets matched, shares will be buyback by the company. Any shareholder can participate in the open market buyback through stock exchange. Only promoters cannot participate in such buyback offer.

Second is the buyback through book-building process, wherein the buyback issuer company appoints a merchant banker to set buyback offer price based on the bid received from shareholders on the electronic bidding centers.

Open market buyback can lasts for few months and there is no concept of record date or proportionate basis allotment. The company only announces the maximum buyback offer price and it has flexibility to repurchase shares at any price upto the maximum price.

Why do companies’ buyback its own shares?

After knowing what buyback is, you must be willing to know that why do companies repurchase their own shares from market.

  1. To balance firm’s capital structure through creating a optimal use of equity and debt capital source.
  2. As shares are acquired back by the issuing company which reduces the outstanding shares held by public and thereby increases the earning per shares (EPS) even at same profit levels.
  3. Buyback helps to take the advantage of undervaluation. The company repurchases the currently undervalued shares, wait for the market to correct the undervaluation whereby prices increase in the intrinsic value of the equity, and re-issue them at a profit. Share Buyback helps reducing the cost of capital. Buying back some or all of the outstanding shares can be a simple way to pay off investors and reduce the overall cost of capital instead of paying the dividends which is a cost of equity.
  4. Companies also more readily repurchase shares at a profit when the stock is liquidly traded and the companies’ activity is less likely to move the share
  5. Buyback of shares also allow companies to distribute their earnings to investors without inflicting them with taxation.
  6. Share repurchases avoid the accumulation of excessive amounts of cash in the corporation.
  7. It supports the share price during periods of sluggish market conditions.

Eligibility criteria to apply for buyback

Undoubtedly, there are certain eligibility criteria predefined by SEBI to apply for shares buyback. If you want to apply for buyback of shares, you must check whether you meet the following conditions or not to be an eligible shareholders.

  • You must be an existing shareholder by having company’s shares in your demat account.
  • You must own company’s shares as on or before the record date declared for buyback. For instance, if the issuer entity has set record date to 10 July, means your demat account must have holdings by 10 July. If you have purchased shares on 10 July then it will take T+2 working days to credit the shares into your Demat account thus, you will not be an eligible shareholder and cannot participate in the buyback offer.
  • Although it is not necessary but it’s good to have share holdings in the buyback entitlement ratio. For instance, if company announces buyback ratio of 15:3 and if you have 15 shares in your demat account means the company can buy back 3 shares.

How to apply for Share buyback?

If you are an eligible shareholder, you can apply for buyback of shares online through your stockbroker. You can directly tender your demat account holdings for buyback through broker’s trading platform. One can apply for the buyback during the buyback period only.

Check out the steps on how to participate in the buyback offer;

  1. Log into your trading account with your broker
  2. Search for the corporate action or buyback event option.
  3. Click on the company’s name of which shares you want to tender or sell.
  4. Fill in required details like the number of shares you want to sell in the tender offer and submit the order.
  5. That’s done! Your buyback order is successfully submitted.

Note: Once shares are tendered then company decides an acceptance ratio which is the likelihood of how much of applied or tendered shares will be accepted for buyback. Any number of shares over and above the acceptance ratio, will be credited back to the applicant’s demat account.

If in case retail category for buyback receives less subscription than 15% means company may have 100% acceptance ratio and all the tendered shares by retail investors will be approved for buy back.

Benefits of Buyback of shares for company and investors

  • Investors can tender or sell their shares to company at a higher price to get profits.
  • Long-term capital gain on buyback of shares is tax-free.
  • Buyback increases share price.
  • Buyback of shares reduces outstanding shares and boosts Return on equity and EPS.
  • It helps to design an effective or optimal capital structure.
  • Shares buyback provides easy exit route to existing shareholders.

Final thoughts on Shares buyback

Whether buyback of shares by a company is good or bad depends on multiple facets. Like if a company has solid growth prospectus and investors have risk appetite too then shareholders may stay invested in the company to get more profits by holding it. Unlikely, if you have low risk appetite and just want to make some returns by selling shares, you may consider tendering of shares for the buyback to get 10%-15% of premium over the prevailing market price.

The choice is ultimately yours whether to stay invested in the company or offloads the holdings over some premium.

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FAQs

    Both dividend and buyback are the ways company reward or pay back to its shareholders.

    When it's come to dividend, its make the market expectation that the company will try to maintain or raise the dividend over time, however buybacks is one kind of reward for shareholders without committing the repeating nature.

    Buybacks can also be more profitable for corporate executives than dividends. Executives which are rewarded the stock options doesn't get a dividend, but they can benefit from a buyback that pushes up the near-term or long-term stock price.

    Buybacks can also be rewarding to shareholders if the company's stock is undervalued. But if the stock is overvalued, buybacks can be a waste of money.

 

  • Board Meeting approves the proposal of buyback : This is the company’s internal meeting where the board of directors passes a resolution for buyback of shares.
  • Public announcement for Buyback: Company has officially made a public announcement of all the material information within two working days from the date of the resolution in at least one English National Daily, one Hindi National Daily and a Regional language daily.
  • Copy of public announcement is submitted to SEBI.
  • Record Date for determining the Buyback Entitlement and the names of Eligible Shareholders: A company making a buyback offer, announce a record date for the purpose of determining the entitlement and the names of the security holders, who are eligible to participate in the proposed buyback offer. It is especially important for short term gainers to buy and keep the company shares in their demat account by or before this date. Only the stocks which are available to investors account on the record date will be eligible for buyback process.
  • Post record date, Registrar validates the entity of holding in the demat account and communicate to the respective holders about the number of shares eligibility and other process. The offer for sale and tender forms will then be available online on your broker’s website.
  • Date of Opening of the Buyback Offer: Investors are allowed to submit the tender form within the period of opening and closing of the buyback offer. The offer for buy back usually remains open for a period of ten working days. You can submit the form online through your broker’s website (ICICI Direct, Zerodha, ProStocks) or call your broker to place your holding under OFS. If an investor doesn’t want to participate in buyback offer, no action is required and their holding is safe in the demat account and can be sold in the open market.
  • Date of Closing of the Buyback Offer: This is the last date to participate in buyback process. If you buy shares immediately after the buyback announcement, and the buyback price is not much higher than the prevailing price, you won’t benefit, since you will also have to pay short-term capital gains tax of 15%. Carefully consider the offer price, before tendering your shares under buybacks, because you stand to gain only if the buyback offer price is significantly higher than the prevailing market price and the quantum of the buyback amount is substantial.
    There are chances when big buyback offer start and investor start locking their holding with Registrar for buyback offer, market start reacting in a positive direction and stock price move above the buyback price, in such case it is better to sell your holding in the open market. Usually smart investors wait until the closing dated before deciding to sell in buyback process or open market.
  • Last date to receive the completed tender forms and other specified documents, including physical equity share certificates by the Registrar.
  • Last date of verification of tender forms by the Registrar: This is a process related step carried by Registrar.
  • Last date of intimation of the Stock Exchange regarding acceptance / non- acceptance of tendered Equity Shares by the Registrar.
  • Last date of settlement of bids on the Stock Exchanges: Registrar get final approval from the exchange.
  • Last date of payment to shareholders/ dispatch of unaccepted share certificate(s) by the Registrar/ return of unaccepted demat shares by Stock Exchanges to Shareholder Broker/ Eligible Shareholders.
  • Last date of extinguishment of Equity Shares bought back.

 

When the company announces buy back offer, that is the best time to start accumulating shares in your demat account. The buyback price is predetermined at the time of announcement. If the buyback price is 10 to 15% higher than the market price, then only it makes sense to invest money in buyback offers.

 

In the tender offer for buyback, shareholders are required to tender the shares to participate. You can offer shares for buyback through your online trading account or alternatively by call n trade. An investor can apply for buyback of shares online through Online Stock Brokers like ICICI Direct, Share Khan, and Angel Broking etc. For this, login to your trading account, navigate to IPO option. If the company has already announced buy back and has initiated the process, then you will see the name of the company there. If not, wait for the option to appear. When you see the company name, click on GO and enter the number of shares you like to surrender for buyback. If chosen by the company, the shares will be bought back.

With discount brokers like ProStocks, Upstox, SAMCO etc, you need to call and request to place your buyback offer. Zerodha is the first discount broker who started online buyback tender form. So you dont need to call Zerodha customer support team. You can tender your buyback request on Zerodha Consol by your own.

 

The whole process usually takes about 3 to 6 months after approval of buyback of shares via tender offer by the board of directors.

 

It takes up to 4-6 weeks to receive money in your account. First, you will get a confirmation email from the registrar regarding the acceptance of shares for buyback before receiving money.

 

Unlike IPOs, there are brokerage charges applied on the shares brought back by the company. Also, there will be demat charges for outgoing of shares from your demat account. However, there is no brokerage charge for tendering the shares, but if your shares are brought back by the company then the brokerage charges will be applied on the number shares brought back by the company. You will receive the money in your account minus the brokerage charges and other tax. Shares not bought back by the company will be refunded back to your demat account. It is better to check with your broker for all the brokerage charges and tax before applying in buyback.

 


User Reviews

3. Raghav Singhania Apr 04 2024 05:32:33 PM Reply
Shares buyback is a significant aspect of corporate finance. This comprehensive guide likely covers all aspects, including the process of how to apply for buyback in Sharekhan and other platforms, providing valuable insights for investors.
2. M R THIPPESWAMY Jul 30 2017 01:18:58 PM Reply
sir,
Will you pl give details about open market share buyback as is announced by justdial share buyback in open market.
1. Is there any offer for small investors as in tender offer method?
2. Is there any record date for open market share buyback?
thanking u

M R THIPPESWAMY
1. Rajesh May 22 2017 01:41:30 AM Reply
HCL Technologies buyback - 1000 Rs per share, Current market price 844 Rs, Record date - 25th May 2017. Stock must be in your detat account by 25th.Last chance to buy script on Monday 21st 2017 to participate in Buyback offer.

Happy Investing.