Objectives/Advantages of buyback
To increase the company’s stock price
To reduce the number of shares outstanding
To improve the company’s performance
To provide a financial return on investment for shareholders
To create a social responsibility for the company
To pay dividend/surplus cash to the shareholders when companies are in a loss and earning profits.
By rewarding shareholders for their shareholding by giving them more money by repurchasing their shares at higher prices than the market price.
If there are no losses incurred during an accounting year, then the company’s earnings per share will be increased by the amount of the hike.
The company merger can lead to a hike in the share value of the shareholder if it is done in order to save tax.
Disadvantages of Stock Buyback
Types of Buyback Shares
- The first type is when the person is happy and content.
- The second type is when the person is unhappy and struggling.
Tender offer
The company offers to repurchase its share or any other specific securities through a letter from the shareholder.
Open market offer
The process of buying and selling shares on the stock market is known as an open market offer. This process is typically done through brokers, who are appointed by different companies. The main purpose of an open market offer is to buy and sell shares quickly and without any time limit. In simple terms, an open market offer allows companies to purchase shares directly from the market.
Why do companies buy back shares?
Since companies have to increase equity capital through the sale of equity and preference shares, it may seem like a compulsion that they have to give their shareholders money back. However, this is not always the case. In fact, some companies choose to retain more equity for themselves in order to grow their businesses more quickly. ..
To create value for their shareholders is to increase the share price.
When a company repurchases their shares, it helps in creating a demand for the stock which in turn increases the value of the shares. This is done by increasing or creating a boost in demand, which then benefits shareholders. Another way to return money to shareholders is through dividends. ..
Purpose
- To reduce the number of outstanding shares
- To increase the value of the company’s stock
- To improve the company’s financial performance ..
Methods of Share buyback
Buying from the open market
In this method, the company repurchases its shares directly from the market. The company’s broker executed all the transactions. Buying shares from the open market does not impose any legal obligation. The company can cancel the stock buyback at any time. As a large number of shares is to be bought, buyback shares happen over a long time.
Direct Negotiation
In a Direct Negotiation buyback method, a company directly speak to the large shareholders/investors to repurchase the company’s share from them. The main advantage is that a company can hammer out the buyback price straight with a shareholder.
Dutch Auction tender offer
In a Dutch auction tender offer, the company put forward a tender offer to the shareholders/investors for repurchasing shares by setting a minimum price range more than the current market price. The shareholders who want to sell their shares can mention the number of shares and the minimum price, and the auction is that it permits a company to recognise the buyback price straight from shareholders.
Fixed price tender offer
In a fixed price tender offer, the company offers to buy back its shares at a predetermined price and on a specific date. The company also includes a premium to the share price in order to attract investors. This offer completes stock buyback in a short period of time.
Conclusion
Section 68 of the Companies Act states that a company can buy back its own shares to improve its stock market status. This process is time-consuming and requires defined planning. There are many good companies, like TCS and Infosys, that reward their shareholders with an increase in profit/dividend from share buybacks. ..
The government has announced that it will not be collecting any taxes from the proceeds of the buyback. ..
The NHS does not require patients to sign anything before receiving care. ..
The buyback shares should not exceed 25% of the total paid-up capital of the company.
