- January 6, 2021
- Posted by: Umesh Paliwal
- Categories: Blog, Featured
What is buyback?
Buyback is a process by which company buyback shares from its shareholders. Generally, companies do buyback to rewards its shareholders. In layman language, under buyback, company comes to the market and asks shareholders to sell their shares at a buyback price fixed by the company. Buyback price is generally above the current market price.
FAQs related to Buyback?
Q. What are the pre-conditions to bring buyback?
a) The maximum size of buyback should not be more than 25% of paid-up equity and free reserves.
So, for example, if any company has Paid-up equity and free reserves of 10,000 Crores, they can’t do buyback worth more than 2500 Crores. That is the upper limit.
If buyback size is less than 10%- only board approval is required.
If buyback size is more than 10% and less than 25% – Shareholder approval is required by special resolution.
b) After buyback, the debt-equity ratio should be within the permissible ratio of 2:1.
c) Buyback should be completed within 12 months from the date of Board approval or Special resolution.
d) The company can-not borrow money from banks and do buy back of its shares.
Q. What are the types of buyback?
There are two types of buyback that is allowed as per SEBI.
a) Open Market Buyback
In this method of share Buyback, the company will be purchasing stocks from existing shareholders of the company directly from the market. Example: “Delta Corp Limited Buyback 2020” announces the buyback plan of its shares up to the price of Rs 100, it means that the company will be purchasing shares of “Delta Corp Limited Buyback 2020” from the open market at a price not exceeding Rs.100 per share.
Scenario 1– If the share price is below Rs.100 in that case, the company will put buy orders at the current market price and purchase shares.
Scenario 2– If the share price is above Rs. 100, in that case, the company will put buy order at Rs. 100 only and if someone is ready to sell at Rs.100 or less then the only company will get back shares.
Open market buyback generally don’t offer any arbitrage, so there is no use of Open market buyback as far as participation of investor is concerned.
b) Tender Offer Buyback
In this type of buyback, the company purchase shares from shareholders at fixed price i.e Buyback price. Tender Offer buyback provides arbitrage and gives opportunity to earn money. Generally, tender offer buyback offer are announced at a price above the current market price (CMP). The difference between CMP and Buyback price is called as arbitrage.
All the terms like Record date, Entitlement Ratio, Acceptance Ratio etc, are relevant only in case of tender offer buyback.
Q. What is Record Date?
Record date is the date on which you must hold shares in your demat account to be eligible for the buyback.
Q. Quota for Retail shareholders?
In every buyback, 15% shares are reserved for retail shareholders.
Q. What is the eligibility condition for retail shareholder?
If you are holding shares worth less than 2lakh on Record date, then you will be eligible for buyback. The highest volume closing price on NSE or BSE is taken as reference for calculating 2 Lakh condition.
Q. What is Entitlement Ratio for retail shareholders?
Entitlement ratio gives the indication of minimum shares that will definitely be accepted in the buyback. It is always calculated on record date.
Let us suppose, the buyback size is 2 Crores shares. Retail quota is 30 Lakh shares (15%). And total number of retail shareholders as on record date is 50 Lakh.
So, entitlement ratio for retail shareholders would be 30/50 = 60%.
Q. What is Acceptance Ratio?
This is final ratio which indicates the total number of shares accepted in the buyback. It is always greater than or equal to Entitlement ratio.
For any other query regarding buyback, please feel free to email us at info@investorzone.in.
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What about the tax on buy back