We normally hear of promoters raising capital by issuing shares in the market. But there are times when the promoter wishes to buy back the shares from the investors. At such times they offer a buy back at a price which is better than the market price.
Buybacks can be carried out in two ways:
- Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.
- Another option is when Companies buy back shares on the open market over an extended period of time.
There are several reasons for the company to buy back shares…
- No promoters like to see the prices of their company falling. Therefore, if they feel that the price of shares is falling in the market, they may decide to buy back shares to shore up the prices.
- Another reason the promoters might offer a buy back is to increase their share-holding if they feel that someone in the market is buying a large number of shares of their company in a bid to take over the company. To protect themself from such a takeover bid, the promoters offer a buy back of the shares to their investors at an attractive price. In other words, for the promoter, it is another way of giving back money to the investors.
- To serve the equity more efficiently and to increase the earnings per share.
- The promoters may also buy back shares from the market, if they feel that the price of the share is lower than its intrinsic value.
Advantages
- It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT).
- To improve return on capital, return on net worth and to enhance the long-term shareholders value.
- To provide an additional exit route to shareholders when shares are undervalued or thinly traded.
- To enhance consolidation of stake in the company.
- To achieve optimum capital structure.
- To return surplus cash to shareholders.
- To support share price during periods of sluggish market condition.
</li style=”text-align: justify;”>To prevent unwelcome takeover bids.