Understanding The Basics Of Share Buybacks

  Author: Puneesh Garg

Whether it is business newspapers, business news in television, news websites and mobile apps, you often come across the term share buyback by companies. For the uninitiated, here is a simple introduction of what share buybacks by companies is all about. 

What is a share buyback? Share buybacks are basically about purchase of own shares by a company, either through open offer or through the regular market. For companies it is a very effective and tax efficient way of distributing wealth to shareholders.

Share buybacks are often announced to send a signal to the market that the management believes that the company’s stock is undervalued with respect to its intrinsic worth or fundamentals.

How investors should evaluate buyback offers For investors, it is important to look at the size of the buyback offer, the buyback price and the duration of the offer. If the buyback size is too small compared to the overall market capitalisation of the company (number of shares multiplied by the current market price), the impact on the stock could be very small.

In a tender offer one also needs to keep an eye on the offer letter and the date by which investor can tender his shares. The shares sold though tender offer attract different tax treatment as they are sold without Securities Transaction Tax (STT). Thus, an investor also has to look at tax implications while selling in tender offer. At FundooMoney, we suggest that for making fresh investment into a company that has just announced buyback investor should base his decision on fundamentals of company rather than the buyback offer.

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