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A falling market might be depressing for investors. For promoters, it is an opportunity to raise their stake. November saw the Sensex hit a two-year low; it has had 13 companies filing documents with the Securities and Exchange Board of India for buyback offers.
Buyback of shares means repurchase using surplus cash in the balance sheet. The company's share capital reduces to the extent of shares bought back, raises promoter holding and improves earnings per share. Shareholders can participate either through the tender offer route or by selling shares in the open market, as may be decided by the company.
A buyback can be through various methods.
The first is through a tender offer, where the company makes an offer to buy a certain number of shares at a specific price, directly from shareholders. This route ensures all shareholders are treated equally, no matter if they hold a majority or a minority stake.
The other route is to make purchases in the open market, where the company acquires a certain number of shares. The company fixes a maximum price and can buy back the shares anywhere up to that particular price. Most companies prefer using this route to buy back their shares.
The biggest difference between the two is that in a tender route, the price of the buyback is fixed.
This route carries certainty on price and quantity parameters. In the open market route, the benefit to a shareholder cannot be accurately judged, since the company could have bought shares at a lower rate.
It isn't possible to always exit at the maximum price the company is willing to buy. It simply provides updates on the number of shares bought.
Investors who sell their shares in a tender route will have to pay tax according to their applicable brackets. "Since you do not pay Securities Transaction Tax in the tender route, there is no tax relief for investors.
It will be treated as business income. Whereas, in the open market route, the seller will only have to incur short-term or long-term capital gains tax, depending on how long you have been invested in the company.
From a cost angle, the difference is significant, up to 10-15 per cent.
The different transaction costs involved in a buyback offer are managers fees, payment of deposit, brokerage, advertising costs and lawyer fees.
Depending on the circumstances, investor benefits would vary depending on whether the exercise is done through tender or open market offer
The two routes of buyback: the biggest difference between the two is that in a tender route, the price of the buyback is fixed. This route carries certainty on price and quantity parameters. In the open market route, the benefit to a shareholder cannot be accurately judged, since the company could have bought shares at a lower rate.
Parameters Open market Tender offer buyback offer buyback Price Maximum price is fixed; Buyback price shares can be bought is fixed back anywhere up to that price
Shares bought Number of shares to be Number of shares to be
back bought back is fixed bought back is fixed
Duration Buyback programme can Buyback programme can go on for up to a year go on up to a month
Transaction costs are Transaction costs don't costs higher by between include brokerage and 10-15 per cent lower advertising costs are
Buyback of shares means repurchase using surplus cash in the balance sheet. It can be through various methods
The firms share capital reduces to extent of shares bought back, raises promoter holding and improves earnings per share
Shareholders can participate either through tender offer or by selling shares in the open market, as may be decided by the firm
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