Infosys share buyback: Why companies repurchase stock and how it helps investors

Share Buyback: Infosys has announced a Rs 9,300 crore share buyback programme - fourth such activity by India's second-largest IT company in the last 5 years. A share buyback simply means purchasing own shares from existing investors/shareholders. It is one of the corporate actions wherein companies buy their own shares from investors at an elevated rate, thus helping the company to improve financial ratios and consolidate its ownership. 

What does buyback indicate for a company/stock?

A company repurchases its shares when it wants to consolidate ownership, preserve stock prices, return stock prices to real value, boost financial ratios or reduce the cost of capital. 

"Investors can benefit from stock buybacks because the practice has generally taken the place of dividends. Companies usually buy when they feel the stock is undervalued," said Manoj Dalmia - Founder & Director, Proficient Equities.

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Investors can participate in this process to gain some profit as the buyback price is usually higher than the current market price. Investors can take this opportunity to accumulate value stocks.

Stock buyback types - Tender Route and Open Market 

1. Tender Route 

When a company announces a buyback through the tender route, it invites shareholders to sell their shares at a pre-defined price (which is generally above the current market price at the time of announcement). The difference between the stock's market price and the offer price is the premium that the company pays t the shareholders. Also, it is executed within a particular time frame.

2. Open Market

In an Open Market route, the company purchases its own shares directly from the market. Transactions are done by the brokers of the company itself.

The company buys its own shares in large numbers and therefore the buyback programme continues for a long time. It means that there is no legal obligation to complete the buyback programme in a pre-defined time.

How to participate in stock buyback

To take part in the buyback programmes, the shareholders should have the stocks in their Demat account before the ex-date (announced by the company). The eligible shareholders have to apply through the Demat account. They have to inform the company about the number of shares they want to sell. Shareholders should take note that charges are applicable for placing the order.

Once the window closes, the company announces the acceptance ratio. The ratio of the buyback depends on factors like the number of shares tendered and the number of applications received from the shareholders for the buyback. Once the ratio is announced, the shares are debited from the Demat accounts of the shareholders and excess shares are credited back. The amount of shares purchased by the company is deposited directly into the bank account of the shareholders. 

In the Open Market route, companies have the flexibility to cancel the buyback programme anytime. It is a cost-effective method on behalf of the promoters of the company as shares are purchased back at the market price only and no premiums are paid.

Differences between Tender Route and Open Market

The tender Route method is for a limited time period during which shareholders can sell their shares at a specified price, while the Open Market is not time-bound, and the shareholder can sell his share to the company at the market price. 

According to Rachit Chawla, CEO, Finway FSC, both methods have some pros and cons, but in terms of return, shareholders get a price higher than the market value through a tender offer. "But, the buyback process completes after verification of the shares by the depository bank; one should have the patience to get back the payment," Chawla added.

On the other hand, Open Offer Route is considered advantageous to the promoter since the company is free to cancel the buyback program at any time without any legal obligation.