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Buy Back Offer
What is a Share Buy Back Offer?
In 2017, we have heard of buy back offers from a number of companies including TCS, Infosys etc. Indiabulls Real Estate, GHCL, Ramco Cement are few other companies. As many as 50 companies announced buy backs till August 2017.
A buyback, also known as a repurchase, is the purchase of outstanding shares by a company there by reducing the number of its shares in the open market.
When a company buys backs its shares from the market, the number of outstanding shares in the market reduces.
This will make the existing shares that were lying in the hands of existing invests post-buy back because it will improve the Earnings Per Share (EPS) and hence make shares more valuable than before.
Further, there will be more demand for the shares because there will be less supply of shares.
A company goes for Buy back in two circumstances:
1. When the company has excess cash and is bullish in its own business. The company feels the buy back is a form of investing in itself.
2. When the company is bullish on itself compared to other opportunities (such as investing in a JV, acquiring or merging with another company etc.)
Companies with excess cash can only do buy back. So, this is a form of better utilization of idle cash.
Nature of buyback
There are several ways in which a company can do a buy back. The popular methods are:
- Tender offer
- Open market purchase
In this method, the company fixes a buy-back price and puts the offer.
In this method, the maximum price and the maximum shares it will accept will be clearly mentioned.
Promoters cannot generally participate in this method.
Existing investors can voluntarily tender their shares by specifying the price and quantity at which they want to tender.
When more than the desired number of shares are tendered, the company will be accept on a proportionate basis or such other process.
Open market purchase
This is the simplest process since the company can buy the shares at the prevailing market price by buying them on the stock exchange through their brokers.
The company is at its liberty to buy the shares from the market at the price it wants and the quantity at which it wishes to buy.
Further, the company does not buy all the shares at once.
It buys in several tranches at different prices spread over a period of time.
The transaction will be done like a typical buy / sell transaction.
Not all shares tendered in the buy back process would get accepted by the company.
Since proportionate basis is used, Acceptance Ratio tells how many of the available shares could get accepted.
Let us see the example of TCS buy-back.
TCS is proposing to buy back 5.61 crore shares at ₹2,850 per share.
There are 52.55 crore shares held by the public.
So this accounts to roughly 10 percent of the public holding.
So, only 10 shares out of every 100 shares would get through the buy back process.
Of course, not all public shareholders will offer their shares in the buy-back.
Are buy backs always good for investors?
Several companies in 2016 such as Sun Pharma, Bharti Infratel, eClerx have come up with share buyback offers.
There was often a different of up to 30% between the CMP and buy back price.
This might tempt retail investors like us to buy the shares and then tender them in buy back later.
When the company came up with a buy back of just 2% or 3%, it need not be seriously considered to be a buy back.
This route was often used because last budget introduced a 10% tax on dividends to people getting more than Rs. 10 lakh as a dividend, so companies have taken to using the buyback route instead.
Promoters get the money as they tender as well, and they pay no tax as it involves STT (tendered through the exchange) and the stocks are held for the long term.
When a buy back was offered, we buy in the market and sell back to the company?
This would be an arbitrage play.
If so everyone can do that.. And insiders might have already done that?!
Company notifies us as to how much quantity of shares in your holding are eligible for the buy back.
Not all quantity is always eligible.
The offer date before which if you have bought those stocks are only eligible.
In most cases, the buy back is of use for the company and existing investors than fresh investors entering into the stock now.
Also since they buy small qty compared to what is in public, the chances of our tender getting bought by them will be very less
Hence I would not buy stock from open market exclusively for tendering to them. It hardly works out
And cmp going up because of buy back news is only temporary, even if it happens.. Because market discounts every news that is on public
Existing investors will get benefit on long term because less public equity, more demand for share and better pie of profit sharing
Usually company buy back quantity will be so low compared to those whose who tender.
Means when price rised on public news it will came down again?
Yes. That is bound to happen. Unless the company is soo precious one. When it happened in a good pharma company like SunPharma and Coal India, it can happen to others too.
SEBI Website on Buy Back Tender Offers and Open Market Through Stock Exchanges http://www.sebi.gov.in/sebiweb/home/list/3/22/0/1/Buybacks
SEBI FAQ on Buy Back of shares: http://www.sebi.gov.in/faq/buybackfaq.html
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