Share Buyback by Companies – Should the Investors Go For It?

Indian companies both private and public have gone on a shopping spree for the buyback of their own shares putting investors in a dilemma.

- Dr. J K Goyal, Dr. Vinod Kumar

Buyback of shares often depicts the confidence of the promoters in their own company’s performance and thus sends positive signals to the investors. However, the announcement of buybacks at a time when the whole economy is reeling under the pressure of expenses associated with dealing with the COVID 19 and its impact on the performance of companies, comes as a surprise making investors think whether they should sell their holdings to the companies concerned.

Buyback of Shares in India

Indian companies were allowed to buy back their own shares by the introduction of three new sections -77A, 77AA and 77B in the Companies (Amendment) Act, 1999. Consequently, the Securities and Exchange Board of India announced certain rules to regulate the buyback activities of listed Indian companies.

Share buyback refers to the act of a company buying back its own shares from the market with the purpose of reducing the number of floating shares available in the open market. The reduction in the floating shares of a company leads to an automatic improvement in the EPS or earning per share for the residual shareholders as well as the promoters thereby boosting the company’s share price. Theoretically, the companies often use Buyback as an alternative to pay dividends to investors. Such buybacks are generally funded from the surplus funds available with the company and not the promoters’ personal funds as is generally believed. So a company having surplus funds but no lucrative investment opportunity may go in for the buyback of its shares.

Major Buybacks in Recent Years

Buybacks have become quite common with several big companies announcing buyback offers in the last couple of years.