Buy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces.
BREAKING DOWN 'Buyback'
A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways:
Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.Companies buy back shares on the open market over an extended period of time.
The reasons for buy-back:
- To improve earnings per share;
- To improve return on capital, return on net worth and to enhance the long-term shareholder value;
- To provide an additional exit route to shareholders when shares are under valued or are thinly traded;
- To enhance consolidation of stake in the company;
- To prevent unwelcome takeover bids;
- To return surplus cash to shareholders;
- To achieve optimum capital structure;
- To support share price during periods of sluggish market conditions;
- To service the equity more efficiently.
Advantages of Buy Back:
- It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT),
- To improve the earnings per share;
- To improve return on capital, return on net worth and to enhance the long-term shareholders value;
- To provide an additional exit route to shareholders when shares are undervalued or thinly traded;
- To enhance consolidation of stake in the company.
- To prevent unwelcome takeover bids;
- To return surplus cash to shareholders;
- To achieve optimum capital structure;
- To support share price during periods of sluggish market condition;
- To serve the equity more efficiently.
