Thread by @FincademyIn

What is Buyback? Should investors take an advantage of buyback or not?

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1/ A buyback, also known as a share repurchase, is when a company buys its outstanding shares to reduce the number of shares available on the open market.

2/ Why buyback?
Companies buy back shares for several reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.

3/ A company may feel its shares are undervalued and do a buyback to provide investors with a return. As buyback is mostly above the market price (when Announced) and because the company is bullish on its current operations,

4/ A buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained.

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5/ The repurchase of shares increases the EPS and hence results in low P/E which can be determined as undervalued and while it increases the price of the shares. You can check recently most of the IT companies are providing buyback like TCS, Wipro, etc.

6/ The market always takes buyback as a good indication and positively reacts with the share prices as well.

Companies perform buyback by two routes i.e., Tender offer and Open Market.

7/ Tender Route is the most common way for the buyback. In the tender route the current shareholders have to make an application for the buyback of shares and on the basis of the demand and company buybacks on the pro-rata and quota allocation basis.

8/ Unpopular Fact - Check in the announcement that do promoters are participating in the buyback or not?. If they are then this is a red flag for the company. So, try not to actively participate in the buyback.

9/ Open Market - The open market is a simple and easy one. The company buyback the shares from the exchanges and completes the buyback process but due to such a heavy demand in the shares the price shoots up if the company has a less free float and

10/ Substantially it will lead to buying at a very high cost then expected and this can make a buyback a costly process.

11/ Taxation - The company (both listed and unlisted company) is liable to pay additional income tax on an amount of distributed income on buyback of shares from shareholders. The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.

12/ As an example, suppose XYZ originally issued shares for ₹10. The shareholder bought the shares at ₹400. The company goes for buy-back of shares at ₹600. In such case, tax is payable on ₹590 (600–10).

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BY :- @pujanshah_15