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Explained | Why share buybacks via open markets are often considered bad

Explained | Why share buybacks via open markets are often considered bad

Explained | Why share buybacks via open markets are often considered bad
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By CNBCTV18.com Oct 14, 2022 7:56:01 PM IST (Published)

A share buyback enables a company to repurchase its shares from the capital market, for reasons such as rewarding shareholders using cash in hand, or boosting the value of the stock, if deemed undervalued. This happens in two ways: through the open market, or through tender route — which means buying directly from investors.

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Investors often prefer tender buybacks to open market buybacks. This is due to certain differences in both types of buybacks.

A tender offer has a fixed price at which each shareholder can participate, but that is not the case in the open market route. A company may declare a maximum price for an open market buyback, but that does not mean that each investor will get the same price as buying happens in tranches at varying prices.
There is no reservation for small investors in the open market route, whereas 15 percent of the total size is reserved for them in case of tender mode.
What's in it for investors?
  • A premium for selling shares
  • More tax-efficient than dividend
  • Typically, buyback announcements lead to higher stock price
  • What's in it for companies?
    • Improved financial ratios such as earnings per share (as fewer outstanding shares are left) and return on equity (RoE)
    • Improved valuation
    • Stronger promoter holding (against takeover threat)
    • Meanwhile, Infosys — India's second largest software exporter — announced its fourth share buyback within five years. The Bengaluru-based IT giant will buy back five crore shares through the open market at a price up to Rs 1,850 apiece — which means a premium of up to 30 percent to the Thursday's closing price.
      The buyback, worth Rs 9,300 crore, is in line with the company's capital allocation policy to return 85 percent of free cash flow till the year ending March 2024 to investors, through dividends and buybacks.
      While the upcoming buyback is through the open market route, just like the previous two buybacks in 2019 and 2021. The Infosys buyback in 2017 was through a tender offer.
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