A buyback is a process a company employs to repurchase its shares from stakeholders
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Forty-eight companies have repurchased shares worth Rs 47,810 crore through buyback offers in 2023, the highest since 2017. In 2022, 58 companies had repurchased shares worth Rs 38,305 crore, according to data from Prime Database. The value of shares repurchased rose this year because of a few large-sized issues like that of Tata Consultancy Services (Rs 17,000 crore), Larsen and Toubro (Rs 10,000 crore), and Wipro (Rs 12,000 crore).
The other prominent buybacks were those of Piramal Enterprises (Rs 1,750 crore), Hinduja Global Solutions (Rs 1,020 crore), Triveni Engineering and Industries (Rs 800 crore), and Gujarat Narmada Valley Fertilizers and Chemicals (Rs 653 crore).
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A buyback is a process a company employs to repurchase its shares from stakeholders. The bought-back shares are extinguished, and the company’s equity base shrinks, enhancing its financial ratios, such as earnings per share and return on equity.
A buyback is carried out either through the tender route, where shareholders surrender their shares to the company in response to an offer received from it, or the open market (the company buys its shares in the open market).
Buybacks have gained popularity over the years as the preferred mode of returning cash to shareholders in a tax-effective manner. Cash-rich companies with high promoter holdings prefer buybacks over dividends to return excess cash to their shareholders.
In the past, the government has used buybacks from public sector undertakings as a tool of disinvestment. Analysts say it is beneficial to investors to tender shares during the buyback since the offer, more often than not, is at a premium to market price.
“If the company is generating free cash flow and if it did not have any immediate need as far as expansion of capacity or getting into new lines of business, they go for buyback. Often, companies announce the buyback at a premium, drawing investors who come for arbitrage opportunities. And the opportunity increases if the promoter or a section of shareholders abstain from tendering shares,” said UR Bhat, cofounder of Alphaniti Fintech.
IT companies have contributed a large share of buyback offers in recent years. Analysts said IT firms don’t have large capex requirements, and it’s better for them to reward shareholders than sitting on reserves.
“For some years, their dollar revenue has been growing in poor single digits. If the companies hold on to cash, their return on capital employed (ROCE) will suffer. For returning shareholders, especially larger ones, it’s better to do a buyback than dividends because it’s more tax efficient. For small and mid-caps to strengthen investor confidence and to hold on to the gains,” said Chokkalingam G., Founder of Equinomics.
Chokkalingam said retail investors should tender if there is a premium to the market price. And if the valuation comfort is no longer there in the company, they should use the buyback to exit as much as possible.
However, he cautioned against buying shares to participate in buybacks.
“Not every share which gets tendered gets repurchased,” said Chokkalingam.
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