What is Buyback of Shares?

What is Buyback of Shares?

A share buyback, also known as a stock buyback, refers to a scenario in which companies repurchase their own shares from a diverse range of shareholders, encompassing retail investors, promoters, institutional investors, and foreign institutional investors. This strategic move enables companies to reinvest in themselves by diminishing the number of outstanding shares in the market, effectively elevating the percentage of shares held by the company itself. Companies carry out buybacks by acquiring their shares at prices higher than the prevailing market rates.

There are two primary methods through which companies can undertake share buybacks:
  1. Tender Offer Share Buyback: In this method, companies directly purchase shares from investors on an individual basis at a pre-determined fixed price.
  2. Open Market Share Buyback: Here, companies execute share buybacks through the stock market, allowing them to repurchase shares from the open market.
Purpose:

Share buybacks serve several purposes:

  1. Effective Use of Surplus Cash: Companies may announce share buybacks as a means to efficiently distribute surplus cash that would otherwise remain idle within the company.

  2. Enhancement of Share Price: When companies believe that their shares are undervalued, a share buyback can be employed to boost the share price. This elevated price acts as a support level or establishes a new base for the share's valuation.

  3. Positive Signal to Shareholders: Share buybacks can convey to shareholders that company promoters hold an optimistic view of the company's future prospects. This can foster investor confidence in the company's trajectory.

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