What is a share buyback?

What is a share buyback?

A share buyback, also known as stock repurchase, is a corporate action where companies buy back their shares from existing shareholders at a premium price. The shareholders are given the choice to either hold their shares or sell them to the company for a profit.

Companies buy back shares with accumulated profits. They choose to pay shareholders instead of investing in the business. It could be a sign that there is no new business opportunity or a sign of confidence in the company’s growth.

Further, the amount of shares bought back is minuscule compared to the total shares issued. In the case of Infosys' share buyback, it is buying back 1 crore out of over 400 crore outstanding shares. Hence, the buyback is unlikely to have any material impact on the share price.

But why would an investor sell their shares back to the company, and what benefit will they get?

To persuade investors to sell their shares, the company sets the share buyback price higher than the current market price (CMP) of the stock. The additional amount above the CMP of the share is called the “premium”.

How does a share buyback work?

There are two methods of share buyback:

• Open market

In an open market method, the company buys back its shares directly from the stock market over a period of time.

• Tender offer

In a tender offer, the company offers the existing shareholders the choice to sell their shares to the company at a premium price that is higher than the share’s CMP within a specified period.

How can investors participate in the tender offer?

Here’s how you can participate in a share buyback

• Submit a form

Contact the company or your stockbroker and apply with the number of unpledged shares you’re willing to sell.

• Acceptance of shares by the company

Generally, the company will accept all your shares if the buyback is not oversubscribed. In case of an oversubscribed buyback, the company accepts shares on a pro-rata basis.

• Payment by the company

Once the company accepts your shares, you will get payment in the form of cash in exchange for the shares.

What should an investor do? Hold or sell?

Whether to hold or sell will be your personal choice based on your perspective and circumstances. But let’s walk through both options so you can make a practical decision.

If you choose to sell:

• Sell the shares at a higher price than the CMP (current market price).

If you have been considering selling your shares for liquidity purposes, then a stock buyback is the right decision. You get a premium price for the shares, and the company gets to buy back shares, making it a win-win situation.

• Tax is levied on the shareholder, not on the company

Earlier, the company opting for a share buyback was liable to pay the taxes, but after the new tax rule effective from October 1, 2024, the amount received by the shareholders in a buyback is taxable as “income from other sources” as per the tax rate application.

If you choose to hold:

• Potential increase in stock price

As mentioned above, a stock buyback can potentially increase the company’s share price and improve its financial strength and performance.

• Risk of lowered liquidity

Depending on the company, if you prefer to hold your shares, you could face liquidity issues in the future, as the number of shares traded and the trading volume will decrease substantially.

• Risk of a fall in the stock price

If the buyback is done to boost the share price temporarily and does not signal a strong financial health of the company, then the share price might fall. To counter this, use fundamental analysis to decide whether to hold or sell.