Share Buyback Offer: Participate or Not?
A share buyback opportunity is always a dilemma-laden instance. Will it be a wise decision in terms of returns?
Here are the details of the process and the options that an investor can exercise:
1. What is a share buyback opportunity?
Fundamentally, a share buyback is done when a company decides to buy its own stocks (shares) from the open market at a premium (greater) price to enhance the value of remaining shares or to increase the overall holding value or to distribute less dividend in the forthcoming instances.
2. What is the need for a company to go for a buyback?
When a company senses that its shares are undervalued in the open market and has surplus cash for the buyback, the firm decides to go for a share buyback offer.
The process of share buyback also displays that company management is confident about the financial performance of the business in the near future.
3. What is the standard procedure of share buyback?
The foremost step of buyback is that the company has to announce its buyback date and the offer price well in advance. This is done to ensure the eligibility to participation. The company then rolls out a tender offer letter to all the shareholders. This letter provides the finer details of shareholding and the number of shares one is selling to the company at the buyback offer price. The letter also holds the details of the tender period.
It is to be noted that a user can authorise a broker for buyback participation. In this case, the broker transfers the stock to the company from the client’s Depository Participant (DP).
Once the paperwork is completed, the total value of the shares at the buyback price is paid by the concerned company directly to the client.
4. How does a client benefit from the buyback offer?
The company buys back its shares at an attractive premium (increased value) to attract more shareholders.
However, it is advised two-three days ahead of the buyback record date, an investor can buy and hold the stocks in his DP. This makes a shareholder eligible for the buyback offer. An investor generally has two options:
a ) The investor can keep holding until the tender period. Once the company informs the investor about the quantity they are buying back, the investor can provide the company with the required stocks. The rest of the shares can be sold in the open market.
b) Once the record date for the share buyback elapses, the shareholder can sell the stocks. When the company issues a tender notification, the investor can buy it from the open market and sell it back to the company.
5. What are the major risks involved in a share buyback programme?
The percentage of the buyback is not decided in advance. It depends on open market participation. In general, the buyback varies from 10-50 percent. It is always advised to devise one’s strategy in accordance with the risk appetite.