Buybacks are in trend but why?

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Companies usually pay dividends to the shareholders and further reward them sometimes with bonus shares. And sometimes also buy back shares from its stakeholders. So what are buybacks?

When a company looks to reduce the number of shares in the market, by purchasing them itself then it is called buy back.

Many times for this, the company provides a rate that is higher than the market price. This is done to attract investors.

In 2022, there has been a massive increase in buybacks. This year until now 52 companies have announced a buyback of 38,369 crore rupees.

Last year in 2021, 42 companies announced a buyback of just 14,341 crore rupees in total. But against that announcement in 2021, the total buyback was 13,568 crore rupees. Meanwhile in 2022, against the announcement of 38,369 crores total buyback till now is just Rs 27,293. This year, out of total buyback IT companies accounted for 2/3rd share.

So why are there more buybacks this year?

TejiMandi’s Head of Research, Anmol Das says ” Instead of dividend payment, buyback is better alternative of rewarding shareholders. If a company has excess cash and it doesn’t want to become acquisition target, then promoters go for buyback to increase their ownership. Besides this buyback is also done with the motive of giving support to valuations.

Now let us talk about how buyback help investors? Whether they should participate in it or not. So first of all you need to know that there are two processes for a buyback. One is a tender route and another one is through an open market route.

In 2022, investors have gained more from the buybacks that happened through the tender route as compared to open market issues. However, in buybacks through the tender route, the actual return depends on the acceptance ratio.

Acceptance ratio basically means that out of total shares you own, how many would get tendered. For example, you have 200 shares of a company and an acceptance ratio of buyback is 32%, then only 64 shares will be bought back in tender.

According to data, in shares like TCS, GAIL, MOIL, Tanla Platforms and GAIL that were bought back through the tender route gave returns in the range of 15.4% to 73.5%.

While in shares like Bajaj Consumer, Emami, Bajaj Auto, Kaveri Seed, Balrampur Chini buybacks happened through the open market and investors got returns in the range of 2.6% to 17.5%.

Hence as compared to the open market, buyback through the tender route has given a higher return.

These figures clear one thing, after the buyback announcement most of the shares witnessed an increase in their share price. Specifically in buybacks through the tender route. Hence whenever a company’s buyback is announced, then to take benefit of the difference in prices, do invest in it.