A company needs to take various corporate actions as per the situation. A buyback is one such corporate action that a company has to exercise at times. In olden times, companies were prohibited from buying their shares. However, in 1998-99, the laws changed and companies were allowed to buy their shares back, which came to be known as 'buyback'.
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What is a Buyback?
A 'buyback' or 'repurchase' of shares is a corporate action under which the company purchases its shares back from its shareholders. The buyback of shares generally takes place at a share price that is higher than the market price. There are two types of buybacks: tender offers and open market offers. Companies can choose any of the two options:
The company makes an offer to buy back its shares at a specific price, which is a price at which shareholders can tender, i.e., sell their shares. The shareholders receive the payout of the sold shares in their bank accounts.
In an open market offer, a company buys back its shares from shareholders directly through the exchange. The buyback period, which is kept long, is a specified buyback offer, so there is hardly any price movement due to the buying activity. The amount of the share proceeds is transferred to the shareholder’s trading account.
What Are the Key Features of a Buyback?
Let’s have a look at the key features of a buyback:
- Selling at a premium: In a share buyback, the company usually expects to receive maximum participation. Because of this, they keep the price of stock buybacks higher than the market price.
- Paperless application: The process of applying for a share buyback is extremely easy. You can apply by using the tender offer that you receive from the company’s RTA.
- Simple process: In a share buyback, if your stocks are allotted, then you receive the buyback amount credited to your bank account. Apart from this, you can transfer unsold buyback shares to your Demat account. It's a simple process.
- Multiple modes to apply: There are multiple ways to apply for a share buyback. You can use a trading platform provided by your broker, or you can visit a branch.
Is It Possible to Modify a Buyback Order?
At times, you may want to modify your buyback order. This is possible except in the case of a takeover, as modification or cancellation is not allowed. Modifications can be of two types:
- Lower modification:
Here, the additional buyback shares will be on hold until the settlement takes place.
- Upper modification:
Here, you will need to place a new buyback order for additional shares.
Can I Cancel the Buyback Order?
Yes, you can cancel a buyback order. Sometimes, you may place a buyback order but realise later on that you want to cancel it. However, this cancellation of buyback orders must take place before the last date of the issue because the shares get released only after the settlement cycle gets over.
What Are Some Important Things to Know About a Buyback
Some major points to know about a buyback are as follows:
- If you apply for buyback through tender, you need to pay charges for it, which are Rs. 20 (excluding GST per order). These charges are non-refundable and need to be paid even if the order is rejected or fails.
- A shareholder is eligible for a buyback even if the shares are pledged. However, the shares need to be unpledged before applying for the buyback.
- The sales proceeds you receive for the buyback are calculated after deducting tax. The company buying shares pays all taxes on the buyback offer.
- To put it succinctly, a buyback is an important corporate action where shareholders get the option to sell the shares at a higher price.
- The shareholder can also cancel the buyback order once it is placed.
- The cancellation can be done only before the issue of buybacks ends.