Introduction to Share BuyBackby Mansi Dandekar Financial Blogger
Share Buyback: It is also known as share repurchase when a company buys its outstanding shares to reduce the number of shares available in the open market. In the company's balance sheet, money from the bank account is reduced and share capital decreases in the same proportion.
Process of Share Buyback: When the company faces share buyback, the board of the company approves it for this. After this, the record date and offer opening and closing dates and buyback prices are announced.
Reason: There can be many reasons for share repurchase by companies, of which the following are the main reasons:
- To Reduce the Supply of Shares: Companies can do share buybacks to reduce their market supply. This reduces the number of available shares in the market, which increases the possibility of their price rise.
- To maintain control over the company: If the promoters of the company feel that their share is not sufficient to maintain control over the company, then they can offer share repurchases to maintain their control over the company.
- To increase the value of shares: If the promoters of the company feel that the price of the shares of the company is not as high as it really should be in the market, then shares can be repurchased to increase the value of the shares.
Apart from the above reasons, there can be many other reasons.
It reflects the company's faith: By buying back, the companies invest in themselves in a way. By reducing the number of outstanding shares available in the market, the proportion of shares owned by investors or promoters increases compared to the shares available in the market. A company may feel that its share prices are lower in the market and investors can be benefited by buybacks. And because the company is enthusiastic about its current operations and feels that profit is going to increase in the coming days, it can do so to further increase the ratio of earnings per share by the buyback. This will increase both the EPS and PE ratio of the stock.
A company can also buy back shares from the cash available with it or by taking loans.
What should shareholders do: The buyback position indicates that the company has confidence in its business activities and the company is expected to grow rapidly. In such a situation, the shareholder should take care of the long-term profit and should not sell the shares.
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Created on Aug 20th 2019 08:45. Viewed 88 times.