Should you tender shares in buyback?

What is buyback?

A part buy backA share repurchase, also known as a share repurchase, is a corporate action to buy back its own outstanding shares from its existing shareholders at a premium to the current market price.

TCS’s offering price for the recently announced buyback is 4,500 per share. Stock currently. doing business on 3,796 per share. But why do companies do this? Buybacks are another form of reward to shareholders in addition to paying dividends by returning surplus cash generated by the company. As the number of shares is reduced after a buyback, it also improves key return ratios such as earnings per share (EPS), return on net worth and assets to continuing shareholders. Sometimes, corporates may even go for buybacks to support the market value of the stock in a volatile market. According to Deloitte’s report on ‘share buyback’ in 2020, Chinese manufacturer, Dalmia India, moved to 500 crore buyback to support its share price. To an investor, a buyback usually indicates management’s confidence in the underlying fundamentals of the business. “By reducing cash on the balance sheet and increasing earnings per share, it is an indicator that the company is confident of its future business,” said Vishal Dhawan, board member, Association of Registered Investment Advisors (ARIA). Buyback is also a tax effective way for investors to sell shares. The sale of shares by way of buyback is exempt from capital gains tax. However, any loss arising from the buyback is also not available for set-off/carry forward purposes as the capital gain from the buyback is an exempt income.

Offer Types

Corporates can offer buybacks in two ways, either through the tender form or through the open market. In a tender offer, the company fixes a fixed price for the buyback and investors can bid with the broker to tender their shares. The buyback offer of TCS mentioned above is through tender offer. The company will buy back shares from those who are shareholders on the record date. The record date has not yet been specified by the company. In open market buybacks, in which promoters cannot participate, the company fixes the maximum buyback price and buys shares from the secondary market at the market price within a certain limit.

For example, Infosys did buybacks in 2021 through the open market route. Shareholders were given the option to sell their shares at a price less than the maximum buyback price 1,750 per share, at a premium of 21% over the market price on the date of notice of buyback.

acceptance ratio

Acceptance ratio, one of the key points to be considered by an investor in a buyback, is the total number of shares accepted by the company in comparison to the total number of shares accepted in the buyback offer.

For example, if you tender 100 shares and the acceptance ratio is 60%, out of the total tendered shares, only 60 shares will be bought back by the company. The balance amount will be credited back to your demat account. The ratio may be higher for retail shareholders as SEBI mandates that 15% of the total buyback size is reserved for small investors who hold up to Rs. 2 lakh in the company Sriram Velayudhan, Vice President, Alternative Research, IIFL Securities, said, “Presence of less retail holding in a share ensures higher acceptance in allotment of more shares to the retail category in a buyback.”

Some investors take advantage of the difference between the buyback price and the prevailing market price. They buy shares at market price and tender shares in buybacks, which happen at a premium. However, they will have to do so before the record date in case of buy back through tender offer. Acceptance ratio plays an important role for such transactions as it decides the profitability ratio. (see table),

Should you tender?

Participation in buybacks is voluntary. Investors can tender the shares and take cash or can also decide not to sell their percentage stake without any additional investment and get the resultant increase.

If you believe that the stock is overvalued over the buyback price considering the future prospects of the company, you may decide to tender the shares.

“The discounted cash flow as well as the current market value in the buyback value versus fair value estimates indicate whether it is a good fit for tender or not,” Dhawan said.

“For investors holding shares for a dividend yield, buybacks can be viewed as a tax-efficient option. For most use-cases, strong buyback offers by high-quality companies are a winning bet for investors. Long term investors can always buy more shares after participating in buybacks,” said Rakesh Singh, chief executive officer, broking, Fisdom.

mint takeaway: If you are a long-term investor and believe in a stock’s ability to generate long-term returns, you may decide not to tender the shares because the buyback is earnings per share (EPS) accretion over the long term. .