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What is buyback of shares?

The buyback of shares is also known as ‘share repurchase’. Buyback of equity


shares is a capital restructuring process. It is a financial strategy that enables a
company to buy back its equity share and securities from the shareholders.
Buyback of shares is the method of cancellation of share capital. It leads to a
reduction in the share capital of a company as opposed to the issue of shares
which results in an increase in the share capital.

A share repurchase is a strategy by which a company buyback its own shares from
the market, usually because management thinks the shares are undervalued,
reducing the number of outstanding shares. The company buys shares directly
from the market or from its shareholders at a fixed price. Buyback of shares is
reverse of the issue of shares by a company where it offers to take back its shares
owned by the investors at a specified price. This offer can be binding or optional
to the investors.

In a no-growth situation, buy-back option is expected to help to correct the


positively twisted equity share capital in the existing capital structure of a lowly
leveraged company that earns stable returns.

Buybacks can be carried out in two ways:


1: Shareholders may be presented with a tender offer whereby they have the
option to submit (or tender) a portion or all of their shares within a certain
time frame and at a premium to the current market price. This premium
compensates investors for tendering their shares rather than holding on to
them.
2: Companies buy back shares on the open market over an extended period of
time.

How is IT sector in India?


Information technology in India is an industry consisting of two major components: IT
services and business process outsourcing (BPO). The sector has increased its contribution to
India's GDP from 1.2% in 1998 to 7.7% in 2017.According to NASSCOM, the sector aggregated
revenues of US$160 billion in 2017, with export revenue standing at US$99 billion and domestic
revenue at US$48 billion, growing by over 13%. USA accounts for more than 60 per cent of
Indian IT exports.

1. Buy back of share by TCS


Last year, TCS had bought back 56.14 million equity shares, representing around
3% of its total equity for around Rs 160 billion. In February, TCS announced that it
would spend Rs 16,000 crore in a buyback, the biggest ever in India. It purchased
over 3 percent of its equity at an 18 percent premium to the market price.

2. Buy back of share by HCL

 In May, HCL Technologies said it would buy back shares worth Rs


3,500 crore – or about 2.8 percent of its equity at a 17 percent
premium to the prevailing market price.
3. Buy back of share by wipro
Wipro in July announced a buyback worth Rs 11,000 crore, amounting to a
purchase of nearly 8 percent of company’s equity at a 19 percent premium to the
then prevailing price.

1. As an investor whether you will opt for buyback of shares?


Your tax liability would depend on how the buyback offer is taking place in the market. There
are two methods: direct buyback from shareholders (off-market deals) and buyback through
stock exchange mechanism (market deals)
For buybacks that are not conducted through stock exchanges, that is, no securities transaction
tax (STT) is paid, the long-term capital gains become taxable
If you buy shares immediately after the buyback announcement, and the buyback price is not
much higher than the prevailing price, you won’t benefit, since you will also have to pay short-
term capital gains tax of 15%
2. If you will be the part of company’s management like CFO, what option you
will select for using cash instead of buyback of shares?

keep in mind that holding on to excess cash also is a viable alternative, although
that course may not be viewed favorably.Holding onto excess cash instead of
spending it on capex or returning capital to investors could spark shareholder
activism and negative PR. As stewards of shareholder value, however, CFOs may
need to consider holding excess cash for a variety of reasons. For example,
management might want use the cash to pursue strategic M&A or buy back
shares when valuations are less expensive, or have a reserve in case the economy
deteriorates. Or management might believe that the organization simply doesn’t
have the capacity to efficiently execute more capex investments.

3. If you are a financial expert or portfolio manager, whether you will choose for
company’s as a part of customer portfolio?