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
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