Thread by @BahlKanan

PayTm is making news about its Buyback😮

Working with Big 4s helped me understand Billion Dollar buybacks💰

Is this #BuyBack by #PayTm unethical?🤔 Read on👇

Here's everything about Buybacks, in layman's language🧵👇

1/ What is a Buyback?

Did you know❓

Reliance can buy Infosys' shares

But as per company law, Infosys itself can't buy its own shares

Therefore, we have 'Share Buyback'

It allows Infy to buy its own shares but cancel them after buying

Why buyback shares at all? Read on👇

2/ Why Buyback?

A. Taxation

Many Indian owners of listed companies make ₹5 Crores+ p.a. 🤯

The tax slab applicable on them is 42.74%🥵

If their company pays them dividend of say, ₹1 Crore

They need to pay ₹42,74,000 as taxes

Whereas, Buybacks are tax free in the hands of owners🤩

Buybacks are taxable at just 18.9% in the hands of company (23.3/123.3)

Making buybacks a very lucrative option for returning profits

B. Increase in Control

Promoters can increase their holding in the co through buyback

Say, if Infy is INR 1,550, then company will announce a buyback at say, INR 1,800

It will induce public shareholders to exit at a premium

And result in an increase in promoter's ownership

3/ How can buyback be done?

Generally, in India we have two methods:

A. Open Market Buyback
B. Tender Offer Buyback

Let us understand them? 👇

A. Open Market Buyback

--> Here the company asks its brokers to buyback shares at the prevailing mkt price

--> When Infy's share was at ₹1,400, co announced a buyback at a price of up to ₹1,850

This meant that brokers will buyback at mkt price until it doesn't exceed ₹1,850

B. Tender Offer Buyback

--> Here, the company decides to purchase:

a. Pre-determined number of shares
b. At a Pre-determined price

--> TCS came up with a tender offer buyback in Dec'21

--> Where it bought back 4 Cr shares at ₹4,500/share

--> Mkt price was ~₹4,000 then

4/ What about the PayTm Buyback?

PayTm raised money in Nov'21 at ₹2,150/sh at a valuation of ₹1.6 Lakh Cr

Now it trades at ~₹530/sh (~34k Cr mkt cap)

Ever since then, it has been reporting a loss of ~₹550Cr to ~₹800Cr every qtr

But isn’t Buyback a way to return profits?

5/ Why it might be doing it?

To return money to the pre-IPO investors

Probably, investors like Softbank, Berkshire can't find buyers even at CMP

And if they sell the shares, the share might see a free-fall

And remember, I told you that buybacks happen at a premium to CMP? 😋

6/ How so sure?

PayTm denied any chanes of buyback a few months back

Such a sudden U-Turn might have been due to the probable reason I cited above

Moreover, the pre-IPO shareholders' lock-in has just ended

Src.: MADHAVENDRA.'s LinkedIn

7/ Has anyone done it in the past?

PayTm is saying it is doing to improve shareholders' wealth

Well, last time someone did a Buyback within 1 year of IPO in 2008 and it was DLF

The share price has never seen the face of 2008 levels even after 14 years :)

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Disclaimer: Not investment advice. Shared only for educational and awareness perspective. Please consult a SEBI Reg. Invt Adviser before taking any investment decision