Share Buyback Explained: What, Why & How

A share buyback, also called a stock repurchase, is when a company purchases its own shares back from the market. This corporate action is often used to return surplus cash to shareholders, improve financial ratios, or signal confidence in the company’s future. Buybacks can influence share prices, earnings per share (EPS), and overall investor sentiment. Knowing how share buybacks work and why companies undertake them can help investors make informed decisions.

A share buyback, also called share repurchase, occurs when a company purchases its own outstanding shares from the existing shareholders, either through the open market or via tender offers.

• It reduces the total number of shares outstanding, increasing each shareholder’s ownership percentage.
  

• Buybacks are regulated by SEBI in India to ensure transparency and fairness.

Companies buy back shares for several strategic and financial reasons:

• Increase Shareholder Value: Reducing outstanding shares can improve earnings per share (EPS).
  

• Signal Financial Strength: A buyback may indicate that a company is confident in its future performance.
  

• Utilise Excess Cash: Companies with surplus cash may return it to shareholders via buybacks.
  

• Support Share Price: Reducing the supply of shares can help stabilise or increase market price.
  

• Prevent Hostile Takeovers: By holding more shares in treasury, companies can limit external control attempts.

The buyback process generally involves the following steps:

• Board Approval: Company management decides and gets board approval for the buyback.
  

• Public Announcement: Details such as buyback size, price, and timeline are disclosed.
  

• Methods of Buyback:
  

  • Open Market: The company purchases shares directly through the stock exchange.
    

  • Tender Offer: Shareholders are invited to tender their shares at a predetermined price.
    

• Execution and Settlement: Shares are repurchased, and the company reduces the outstanding shares.

Consider a company with 1 crore shares trading at ₹100 each, planning to buy back 10 lakh shares:

• Current EPS: ₹10 (Net profit ₹10 crore / 1 crore shares)
  

• Post Buyback Shares: 90 lakh
  

• New EPS: ₹11.11 (Net profit ₹10 crore / 0.9 crore shares)
  

The EPS rises, which can positively influence investor sentiment.

Share buybacks offer multiple benefits to the company and shareholders:

• Enhanced EPS due to lower share count.
  

• Tax-efficient way to return money compared to dividends.
  

• Improves financial ratios like return on equity (ROE).
  

• Boosts investor confidence by signaling a healthy balance sheet.

While buybacks can be beneficial, they also come with certain drawbacks:

• Reduces available cash reserves, which may impact future investments.
  

• Market misinterpretation can occur if buybacks are seen as a lack of growth opportunities.
  

• Temporary share price support may not reflect long-term fundamentals.

Share buybacks are a commonly used corporate strategy that can enhance shareholder value and reflect a company’s confidence in its financial strength. However, both investors and companies must assess the long-term implications and opportunity costs before engaging in or relying on buybacks.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.