Last Updated on November 7, 2023 by BFSLTeam BFSLTeam
Buying and selling shares is a critical part of the stock market. A company’s share price can generate multiple insights into its performance, financial well-being and the value of its business. Companies may want to repurchase a portion of their shares being traded in the markets. They look to repurchase the shares from some of the current shareholders. The retail category of investors (with a value of less than Rs. 2 Lakhs) has a 15% reserve in the total buyback offer. If you want to participate in a share buyback, this article will help you understand everything there is to know about buybacks, including how buyback works, the buyback of shares procedure, how to tender shares for buyback, and much more.
Table of Content
Let us begin by understanding what a buyback offer. Buyback of shares is the term given to situations wherein the company repurchases its shares from current shareholders. Therefore, companies that had earlier issued shares pay some of their shareholders and absorb that part of the ownership several investors had before.
There are multiple options available through which a company can buy back its shares. Let us understand what they are:
- Open Market Share Repurchase – A company may directly repurchase shares from the open market through this mechanism. The company’s brokers execute the process of buying back a significant portion of shares over a period.
- Fixed Price Tender Offer – Companies may use this method to approach shareholders for buybacks through tender offers. Existing shareholders willing to sell their shares to the company may do so by submitting their shares. In a fixed-price mechanism, the price at which the company seeks to repurchase shares is fixed and might be over and above the current market price. Additionally, the tender offer is valid through a specific period.
- Dutch Auction Tender Offer – The company gives a range of feasible prices to shareholders in a Dutch auction tender offer. The lowest price offered using this method exceeds the share’s current market price. Shareholders bid with the specified quantity of shares and their preferred selling price.
Applying for a buy back of shares in India is a simple process. However, the first step is to verify if you are qualified to participate in the process. The record date is a critical factor that decides whether you are eligible for a share buyback. Companies typically set a record date for the buyback offer, which is like a cut-off date. So, if you have purchased shares after the record date, you will not qualify to participate in the offer.
Another key term used during buybacks is the acceptance ratio. An acceptance ratio comprises the percentage of shares a company is willing to buyback from a specific investor. Suppose you hold ten shares of a company. According to the acceptance ratio, the company might purchase only five shares from you.
A Demat account serves as a repository to store your purchased securities. When you sell some of your securities, they get removed from your Demat account. Similarly, you can use your Demat account to participate in a share buyback. Let us now understand the buy back of shares procedure:
- If the company has just opened a buyback offer, you will see it flash under an “offer for sale” section depending upon your brokerage. You can check the details provided for the offer, such as the price and validity details mentioned by the company.
- You will be given a tender form to fill out by the company as a part of your buyback application process. You must enter specific details in this form, such as:
(i) The number of shares you hold of the company on the record date.
(ii) The number of shares that fit the buyback eligibility criteria.
(iii) The number of shares you are applying for the buyback process.
- As your application is processed, the shares booked for the offer are transferred to the company’s Registrar and Transfer (R&T) Agent. You will also receive an acknowledgement of an initiated request from your brokerage house through an e-mail or a registration slip.
- Once the company validates its tender offer, it will approve shareholder buyback requests proportionately. The consideration of shares that qualify for the buyback will be credited to the shareholder’s account. Additionally, the shares which have not been approved for buyback get unblocked in the shareholder’s Demat account.
There can be several reasons that can drive companies to repurchase their shares, some of which are discussed below:
- A company might invest surplus funds into buyback
- The business might want to give employees a portion of the equity as a non-cash compensation payment
- Raise promoter holding in the company
- For manipulating stock prices
Earnings per share (EPS) is a crucial metric that investors use to evaluate a company’s financial well-being. It is determined by dividing a company’s earnings by its average outstanding shares. By repurchasing their own shares, companies may reduce the value of the total shares, thereby lowering the value in the denominator for EPS calculation. As a result, the company may present a better EPS value and look more attractive.
Companies seeking to repurchase a portion of their issued shares may repurchase them from the existing shareholders through a share buyback process. Retail investors with a Demat account and holding shares before the record date are eligible to participate in the process.
