What is Buy Back?
A share buyback is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, reducing the number of outstanding shares. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.
Advantages of Buy Back:
It is an alternative mode of reduction in capital without requiring the approval of the Court/CLB(NCLT),
- to improve the earnings per share; to improve return on capital, return on net worth and to enhance the long-term share holder 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 prevent an unwelcome takeover bid
- to return surplus cash to shareholders
- to achieve an optimum capital structure
- to support share price during periods of sluggish market condition
- to sever the equity more efficiently
EPS gets improved as can be been with the below-mentioned example
|Particulars||Pre Buy – Back||Post Buy – Back|
|Number of Shares||10||5|
Advantages to Investors:
Boost in Share Prices
When the economy is faltering, share prices can plummet as a result of weaker than expected earnings amongst other factors. In this event, a company will pursue a buyback program since it believes that company shares are undervalued. Companies will choose to repurchase shares and then resell them in the open market once the price increase to accurately reflect the value of the company. When earnings per share increases, the market will perceive this positively and share prices will increase after buybacks are announced. This often comes down to simple supply and demand. When there is a less available supply of shares, then an upward demand will boost share prices.
When companies pursue buyback programs, this demonstrates to investors that the company has additional cash on hand. If a company has excess cash, then at worst the investors do not need to worry about cash flow problems. More importantly, it signals to investors that the company feels cash is better used to reimburse shareholders than reinvest alternative assets. In essence, this supports the price of the stock and provides long-term security for investors.
At Present the LTCG in the hands of share holder is Nil if the shares participate in the Buy-Back. But, with effect from April 01, 2018, buyback triggers capital gain tax. The buyback of listed shares held for over a year, qualifies as long-term capital gain (LTCG) and the same will be taxed at 10%, if the LTCG exceeds Rs.1,00,000. The Gains realized till January 31, 2018 are grandfathered and will be exempt. (Finance Bill 2018 Proposal).
In case the shares are held for a period less than a year, the gains would qualify as short term capital gain (STCG) and would generally be taxable at an effective tax rate of 16.22% (inclusive of surcharge & cess).
It will be worthwhile to note that a non-resident investor possessing a valid Tax Residency Certificate can avail the beneficial provisions of the relevant Double Tax Avoidance Agreement entered into by the Indian government with its tax residence country.
How to apply for Buy Back
- Investor who is holding shares in their demat account on the record date of buy back will be notified by the company for the eligible shares for participating in buy back officer.
- On receipt of the intimation, Investor should write to Tradeplus from their registered email-ld to participate in the buyback offer and mention the quantity to apply for buy back.
- Based on the request, Tradeplus will move the respective shares to the clearing corporation and also place the order in the exchange platform.
- Response email confirming the bidding of the shares in the exchange platform will be communicated by Tradeplus.
- Upon acceptance of the shares for buyback, company will send the respective payment to the clients registered bank account directly and also confirmation details also sent to the client by TRADEPLUS.
- If the payment failed to credit in the client bank account, the same will be sent to TRADEPLUS by the exchange.
- Tradeplus will credit the buy back amount in the trading ledger of the client and client can withdraw at any time after the credit as per the normal payout process.