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Why Did My Buyback Bid Fail

Introduction 

There are several corporate actions that the company may have to take when the need arises. One such corporate action is Buyback. At times, there is a possibility that an investor may bid for a buyback, but their bid is not successful. We will try to understand the same in this chapter.  

What is Buyback?

Buyback or share repurchase is the practice under which the company buys back its shares from its present shareholders. This is done with the objective of reducing the number of shares available in the open market. These shares are bought at a price better than the market price.

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There are two methods of buybacks i.e., tender offer and open market offer. Let’s go through it:-

  • Tender Offer

The company offers to buy back its shares at a specific price. Shareholders can tender, i.e., sell the shares at this price. The amount received from sales of shares proceeds will be transferred to the shareholder's bank account.

  • Open Market Offer 

Under the Open Market Offer, the company buys back its shares through the exchange from the seller. The buyback offer itself mentions the buyback period. This can exist for months, so there are not many ups and downs in the price movement due to buying shares. The sales proceeds of shares are credited to the shareholder’s trading account.

There are several reasons why a company buyback its shares from its shareholders. Before entering into a buyback offer, an investor must research the reason behind the buyback of shares by the company.

How does Buyback Work?

Buyback is a good way for companies to invest in themselves. Here, the number of shares outstanding in the market reduces, which increases the proportion of shares owned by the directors. A company may at times feels that its shares are undervalued and they undertake a buyback to make investors earn returns.

When the company comes up with a buyback offer, they are quite positive about its operations. It boosts the proportion of earnings that a share is allocated. This results in the increase of share price only if the same price-to-earnings (P/E) ratio is maintained.

The buyback of shares reduces the number of existing shares. As a result, the company’s overall equity worth increases. The buyback also indicates that the company has enough cash to meet emergencies and very rare chances of economic troubles.

Why does a buyback bid fail?

There are chances that you may have applied for buyback and your bid was not successful. The buyback offer remains open for a specific period. The acceptance ratio of the buyback is calculated when the window closes. This is based on the number of shares sold and the number of shareholders applying for the buyback.

The buyback results in three possible outcomes. They are as follows: -

  1. All those shares that are tendered are accepted.
  2. A partial number of your shares are accepted.
  3. Your entire bid is rejected.

There are rare chances of your bid getting failed if you hold shares of the company offering buyback in your demat account on or before the record date.  

Can the orders be modified in buyback?

Modification of buyback orders is possible, but there is a certain limitation to it. You can’t modify or cancel the orders in case of Takeovers. The two major types of modifications are as follows:- 

1. Lower Modification

In case of lower modification, buyback shares are kept on hold at first. They are released at the time of settlement,

2. Upper Modification

Upper modification is not directly possible. You need to place new buyback orders. 

Conclusion

Through buyback, the company is giving an opportunity to its shareholders to earn higher gains. As the buyback is priced at a better price than the market price. Take care to have the shares of the company offering buyback in your demat account before the record date. If you don’t hold the shares before the record date, your bid may get failed.

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