Why do companies buy back shares

Vidya is a chartered accountant in Noida and she invests in the share market and recently she got good news. The companies she had invested in was offering to buy back her shares. This offer increased the price of her shares and she got good returns.

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 gives a higher price than the market price to attract investors to give up shares.

In 2022, there was a a massive increase in buybacks. According to Prime Database, 58 companies went for a buyback of 38,735 crore rupees.

So why do companies buy back shares
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 the process of buyback. Buyback is now undertaken through the tender route. Which means, the shareholder has to offre his shares for buybacks. However, the actual return depends on the acceptance ratio.

Acceptance ratio basically means that out of total shares you own, how many are accepted back by the company. 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.

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