What You Must Know About Share Buybacks

  Author: Puneesh Garg

On and off in the business pages of your newspaper or on television news, you get to hear the terms “share buyback”. In case you don’t know what it is and want to know about it, read on.

Share buyback defined As the name suggests, share buybacks are about companies buying their own shares back from various types of investors.  Buybacks are typically done through open offers or through regular market. It is a very effective and tax efficient way of distributing wealth to shareholders. Often, it is announced to send a signal to the market that the management believes the company’s stock is undervalued with respect to its intrinsic worth or fundamentals.

What investors must watch out for It is important for investors 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 with the overall market capitalisation (current market price multiplied by the number of shares) of the company, the impact on the stock could be very small.

New investors For making fresh investment into the company announcing buybacks an investor should base his decision on fundamentals like track record of company’s earnings growth rather than the announcement. But what should existing investors of the company do?

Existing investors In tender offer one needs to keep an eye on the offer letter and the date by which investor can tender his or her shares. Moreover, shares sold though tender offer attracts different tax treatment as they are sold without securities transaction tax (STT). Therefore, an investor also needs to consider the tax implications while selling in tender offer.

Suggested video: What you should do during a share buyback