Share buyback

Share buyback happens when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buyback shares to increase the value of remaining shares by reducing the supply or to prevent other shareholders taking the opportunity. While the number of shares in circulation falls, shareholders’ stake in the company and the amount they are due from future dividends increases.

Share buybacks can have many benefits:

First, since the company’s value remains the same but the supply of shares is lower, the share price will, in general, tend to increase. However, that depends on market behaviour. When the share price is lower than the tangible net asset value (TNAV) per share, the buyback will cause the latter to increase since there will be fewer shares in circulation (once the repurchased shares have been cancelled).

Second, the earnings per share (EPS) increases due to a reduction in outstanding shares. Shareholders will have a greater share in the company’s profits, which in turn makes the share price more appealing to investors.

Third, shareholders who don’t sell their shares during a buyback don’t make a cash return and, therefore, don’t have to pay any tax.

Share bu y backs enable companies to generate additional shareholder value. Under regular market conditions, the portion of profits that a company uses to buy back shares has a positive effect on the share price.

For instance, a listed company has 1,000 shares of which a shareholder owns 100 (a 10% stake). The company runs a share buyback programme to purchase 100 shares, which reduces the total number of shares to 900. That shareholder’s stake will rise 1.11% to 11.11%, which means they will be entitled to a greater share of the profits.

Share buybacks can even show the investors that the business has enough funds for emergencies and any economic issue. But, this can also cause a negative effect and may give the investors an impression that it does not have a profitable opportunity for growth.

The share buyback is done using a company’s earning, the net effect to investors would remain the same as shareholder dividends.

The Wipro board on Apil 27, 2023 announced a share buyback of up to ₹ 12,000 crore through the tender offer route, entailing 26.96 crore equity shares at a buyback price of ₹ 445 apiece.

The buyback price is at an 18 per cent premium to April 27 closing price of ₹ 374.35 a share on BSE.