What is share buyback?

What is share buyback?

News:

1.  With prominent companies such as Infosys, TCS, and L&T having gone for a share buyback, there is low-down on the mechanism and the reason for firms taking such a step.

Important facts:

2. A buyback is a mechanism through which a listed company buys back shares from the market.

3. A buyback can be done either through open market purchases or through the tender offer route.

4. Under the open market mechanism, the company buys back the shares from the secondary market while under tender offer, shareholders can tender their shares during the buyback offer.

5. Most companies had preferred the open market route.

6. Buybacks are done when a company has a significant cash reserve and feels that the shares are not fairly valued at the current market price.

7. Promoters also use this mechanism to tighten their grip on the firm.

8. Benefits:

• Buyback is usually done at a price higher than the then prevailing market price, shareholders get an attractive exit option, especially when the share are thinly traded.
• It is also more tax-efficient than dividends as a way to reward shareholders.

9. A company execute a buyback in the following manner:

• A company can use a maximum of 25% of the aggregate of its free reserves and paid-up capital for a buyback.
• A special resolution needs to be passed at a general meeting.
• However, it the company plans to use less than 10% of its reserves then only a board resolution is required.

10. A company cannot do a second buyback offer within one year from the date of the closure of the last buyback.

11. There are time-bound limitations on further share issuances like preferential allotment or bonus issue post a buyback.

12. These checks have been put in place so that companies do not misuse the buyback mechanism.

13. Recently, The Securities and Exchange Board of India (SEBI) has revised the buy back regulations that stipulate 15% reservation for retail shareholders in a buy back offer.

14. This gives retail investors a fair share in the offer, which otherwise could see large institutional investors tendering their shares leaving little or no room for small  investors.