Buy_Back
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Buy Back

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.