Understanding Share buy-back

18 Feb

Posted by Shyam as Funda Corner

What does share buy-back mean?

The term share buy-back is used when a company is interested in getting its shares back from its shareholders.

Why is it so?

There are various reasons for company to do so some of which are listed below:

When the company buys back its shares, its shows the confidence the company has on itself. This puts a positive influence on its shareholders.
There gets reduction in the number of shares of that company making hike in the price value of the shares.
It is done so as to avoid others take advantage of the shares available and become dictator of the company.
This step is also taken by the company to offer the shareholders to get price of shares more than the market price which helps them gain profit.

How is it done?

This can be done in open market or through tenders. In the open market, a certain price of the shares is announced by the company and the selection takes place from the applications given by the shareholders if the price matches with the minimum set by the company. On the contrary, in tenders, the shares are bought back by the company at price as specified by the company. The time period here is fixed to be a fortnight which has no restriction for open markets.

Is it compulsory for investors to accept the offer?

There is no compulsion on the investors to sell off their shares. They are free to choose upon certain factors and make their own decision. The certain factors to be determined may be the number of shares, reason the company is interested to buyback, future planning of the company etc.