All You Need To Know About Shares Buy Back

What is Buy Back?

A share buy back is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, reducing the number of outstanding shares. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.

Advantages of Buy Back:

It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT),

• to improve the earnings per share; to improve return on capital, return on net worth and to enhance the long-term shareholders value
• to provide an additional exit route to shareholders when shares are undervalued or thinly traded
• to enhance consolidation of stake in the company
• to prevent unwelcome takeover bid
• to return surplus cash to shareholders
• to achieve optimum capital structure
• to support share price during periods of sluggish market condition
• to sever the equity more efficiently

EPS gets improved as can be been with the below mentioned example

Particulars	Pre Buy – Back	Post Buy – Back
Profit	100	100
Number of Shares	10	5
EPS	10	20

Advantages to Investors:

Boost in Share Prices

When the economy is faltering, share prices can plummet as a result of weaker than expected earnings amongstother factors. In this event, a company will pursue a buyback program since it believes that company shares are undervalued. Companies will choose to repurchase shares and then resell them in the open market once the price increase to accurately reflect the value of the company. When earnings per share increases, the market will perceive this positively and share prices will increase after buybacks are announced. This often comes down to simple supply and demand. When there is a less available supply of shares, then an upward demand will boost share prices.

Excess Cash

When companies pursue buyback programs, this demonstrates to investors that the company has additional cash on hand. If a company has excess cash, then at worst the investors do not need to worry about cash flow problems. More importantly, it signals to investors that the company feels cash is better used to reimburse shareholders than reinvest alternative assets. In essence, this supports the price of the stock and provides long-term security for investors.

Tax Matters

At Present the LTCG in the hands of shareholder is Nil if the shares are participated in the Buy-Back. But, with effect from April 01, 2018, buyback triggers capital gain tax. The buyback of listed shares held for over a year, qualifies as long term capital gain (LTCG) and the same will be taxed at 10%, if the LTCG exceeds Rs.1,00,000. The Gains realized till January 31, 2018 are grandfathered and will be exempt. (Finance Bill 2018 Proposal).

In case the shares are held for a period less than a year, the gains would qualify as short term capital gain (STCG) and would generally be taxable at an effective tax rate of 16.22% (inclusive of surcharge & cess).

It will be worthwhile to note that a non-resident investor possessing a valid Tax Residency Certificate can avail the beneficial provisions of the relevant Double Tax Avoidance Agreement entered into by the Indian government with its tax residence country.