We often see companies announcing a buyback of their equity shares, leading to a surge in their prices. Larsen & Toubro, the infrastructure and engineering conglomerate recently announced a buyback of up to Rs 10,000 crore. Wipro recently concluded its Rs 16,000 crore share buyback. Piramal Enterprises has also approved a Rs 1,750 crore share buyback on Friday.
Even mid and small-sized companies like Aarti Drugs announced their second share buyback in two years. In this piece, we explain to you everything you need to know about share buybacks in 15 questions.
What is a share buyback? And why do companies opt for it?
A share buyback is when a company repurchases its own shares from existing shareholders to reduce the number of shares available on the open market.
Why would a company buyback its own shares and not issue new ones?
- To increase promoter holding
- To support the share price and pay surplus cash to shareholders
- To increase the Earnings per Share as buyback reduces the number of outstanding shares
- Safeguard against hostile takeovers
What are the types of share buybacks?
Generally, share buybacks in India are carried out in two ways - One through a tender offer and the other through the open market. Let’s explain each of these individually.
What is a tender offer buyback?
A tender offer buyback is the one in which the company announces a fixed price at which it will buyback shares from the existing shareholders. Wipro's buyback was fixed at Rs 445 per share. L&T's buyback has an upside price cap of Rs 3,000. A tender offer buyback remains open for 10 working days. Wipro's share buyback opened on June 22 and closed on June 30. L&T and Aarti Drugs are yet to announce the date of their respective buybacks.
Is it mandatory for shareholders to tender shares in the buyback?
No. It is up to them to decide whether to accept the buyback price or not. If they feel it is a substantial premium to their acquisition cost and current value of the share, they can tender their shares in the buyback. In case they feel the stock has the potential to rise much higher than the buyback price, they may refuse to tender their shares.
What is a record date?
Record date is the date which makes shareholders eligible to participate in the buyback. June 16, 2023 was the record date for Wipro's share buyback. This means that those individuals, who had shares of Wipro, as of closing on June 16, 2023 are eligible to participate in the share buyback.
How can you participate in a tender offer buyback?
Shareholders need to submit a buyback form in which they need to mention the number of shares they are tendering in the buyback along with the price. The minimum number of shares that can be tendered is generally mentioned in the form. The shares can be tendered online using broking platforms.
Do all the shares tendered in the buyback get repurchased by the company?
That depends on the acceptance ratio. Acceptance ratio in a buyback refers to the proportion of shares tendered or offered by a shareholder that the company is willing to accept for repurchase. Acceptance ratio is generally expressed in percentage terms.
If the number of shares tendered in the buyback are more than the original plan, the acceptance ratio will be less and vice versa.
For instance, if the percentage stake in the open offer is 26 percent and the percentage stake held by external shareholders is 52 percent, then the acceptance ratio is 0.5. This means the company will accept one share for every two shares held by external shareholders.
What happens to the shares not accepted for the buyback?
They are released back to the individual shareholders' demat account, while those accepted are extinguished.
What is an open market buyback?
An open market buyback, as the name suggests, is where companies purchase their shares from existing shareholders from the open market and not through a tendering process.
Do companies carry out open market buybacks?
Yes. Infosys' Rs 8,260 crore buyback in 2019 and the Rs 9,200 crore share buyback in 2021 was done through the open market route. New-age company Paytm also completed an Rs 850 crore share buyback through the Open Market route.
Does An Open Market Buyback Have a Fixed Duration?
It does. But unlike a tender offer buyback which has to conclude in ten working days, open market buybacks can run for as high as six months or completion of the maximum buyback size, whichever happens earlier.
How does an open market buyback benefit companies?
When companies announce an open market buyback, they generally impose a price ceiling up to which they will repurchase the share. However, unlike a tender offer, it is not necessary for them to pay a premium as they can repurchase the shares even at the current market price.
For example, Paytm had announced that it will buyback shares from the open market at a maximum price of Rs 810. However, when the offer was completed, it revealed that it bought back shares in the price range of Rs 702.65 to Rs 480.25 apiece. This means that the maximum buyback price was never reached.
Does an open market buyback call for regulatory intervention?
Market regulator SEBI in March this year has announced that it will eventually phase out the open market share buyback route. Until that happens, it has made some changes to the rules of an open market buyback.
What are the changes made by SEBI?
The market regulator has placed restrictions on the placement of bids, price and volumes for companies. For example, a company will now not be able to place bids in the pre-open session, first 30 minutes or last 30 minutes of the trading session.
Next, the company's purchase price should be within 1 percent of either side of previous day's trading price. For example, if a share closed at Rs 100, the buyback price the next day should be between Rs 99 and Rs 101.
Lastly, the company has to now utilise 75 percent of the proceeds of the buyback through the stock exchange route, instead of the existing 50 percent.
