Buy-Back of Shares : An Opportunity

Buy-Back of Shares :  An Opportunity

History :

Buy-Back occurs when a company pays shareholder a value per-share and re-absorbs that portion of ownership that was previously distributed among various investors.Buy-back of shares was introduced in India on recommendation of Justice Dhanuka Committee in 1998.  It is normally used for shareholder wealth maximization.

Buy-back Routes : 

Company conducts buy-back of its shares from existing shareholders, usually at a premium to the market price. Buy-Back is Conducted in India via 2 main routes namely Tender Route and Open Market Route

• Tender Route : Both promoters and public shareholders can offer their shares in a tender buyback. Number of shares and Price of Buy-Back are both fixed.

• Open-Market Route : Only public shareholders can take part under open-market route. Number of shares and Maximum ceiling price are prescribed. But company is allowed to buy lower number of shares and also at a lower rate.

Pro's and Con's of Buy-Back : 

PRO's : Utilization of Excess Cash

            Reduction of total share capital resulting in better EPS

            Positive Psychology

CON's : Opportunity cost of fund used as Buy-Back

Opportunity for an Investor from Buy-Back Event :

• An investor intending to benefit from a Buy-back event has to purchase shares prior to record date as declared by the company
• Investor has to submit/tender shares during a 2-week window as declared by company in letter of offer
• Acceptance of shares in buy-back depend upon various factors like participation of various shareholders, price , valuation , size of issue etc.
• In the interest of small shareholders, SEBI has introduced a provision in 2012 that 15% of total buy-back issue shall be reserved for small-shareholders only.
• A small shareholder has been defined as a shareholder whose value of shares in the share under the buy-back is less than 2 Lakh Rs as on record date
• Considering the above provisions it is possible for small shareholders to make a considerable return investing in buy back opportunities across the year
• Level of risk is reduced substantially in Buy-back investing as factor of uncertainty is greatly eliminated

Thank you !! :)