Understanding Share Buybacks: Benefits and Recent Trends in 2024

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Greetings,
I have been working in the stock market for 15 years, engaging in jobbing, IPOs, futures, and buybacks. Today, I am sharing my experience with buybacks. Share Buyback is a process where a company repurchases its own shares from the market. This usually happens when the company believes that its shares are undervalued. The process involves the company buying back its shares from the shareholders. There are several advantages to this-

1 𝙋𝙧𝙞𝙘𝙚 𝙄𝙢𝙥𝙧𝙤𝙫𝙚𝙢𝙚𝙣𝙩: When a company buys back its shares, the number of shares available in the market decreases, which can lead to an increase in the price of the remaining shares.
2 𝘽𝙚𝙣𝙚𝙛𝙞𝙩 𝙩𝙤 𝙎𝙝𝙖𝙧𝙚𝙝𝙤𝙡𝙙𝙚𝙧𝙨: During the buyback, shareholders are offered a premium price for their shares, which can be beneficial for them.
3 𝙃𝙞𝙜𝙝𝙚𝙧 𝘿𝙞𝙫𝙞𝙙𝙚𝙣𝙙𝙨: After the buyback, the company's profits are distributed among fewer shares, which can result in higher dividends for the remaining shareholders.

𝘾𝙖𝙩𝙚𝙜𝙤𝙧𝙞𝙚𝙨 𝙤𝙛 𝘽𝙪𝙮𝙗𝙖𝙘𝙠

There are two main categories of buybacks:

1 𝙍𝙚𝙩𝙖𝙞𝙡: For retail investors, 15% of the total buyback size is reserved. This means that if a company conducts a buyback of ₹1 crore, ₹15 lakhs of this amount is specifically allocated to buying shares from retail investors. Many retail investors are not aware of the buyback or do not participate in it. As a result, the shares allocated for the buyback among retail investors are distributed among the fewer who do participate. This often leads to a higher benefit for those retail investors who apply for the buyback, as they receive a larger share of the buyback amount.

2 𝘾𝙤𝙧𝙥𝙤𝙧𝙖𝙩𝙚: This category is for large institutional investors and corporates.

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𝙍𝙚𝙘𝙚𝙣𝙩 𝘽𝙪𝙮𝙗𝙖𝙘𝙠 𝙀𝙫𝙚𝙣𝙩𝙨 𝙞𝙣 2024

This year, several major Indian companies have announced share buybacks. It will be interesting to see which companies have utilized this strategy and their reasons behind it.

1 TCS (Tata Consultancy Services):
TCS has started a big buyback program to attract and build trust with its shareholders. The program is worth about ₹18,000 crore, and the buyback price is set at ₹4,500 per share.
2 Wipro:
Wipro has also announced its share buyback, proposing a buyback worth ₹12,000 crore.
The buyback price is set at ₹500 per share.

3 Infosys:
Infosys has announced a buyback program worth ₹9,200 crore.
The buyback price is set at ₹1,750 per share.

4 Reliance Industries:
Reliance Industries has also announced a share buyback worth ₹15,000 crore.
The buyback price is set at ₹2,800 per share.

𝙉𝙚𝙬 𝙏𝙖𝙭 𝙍𝙪𝙡𝙚𝙨 𝙤𝙣 𝘽𝙪𝙮𝙗𝙖𝙘𝙠

In the 2024-25 budget, the government has announced new rules related to buybacks, effective from October 1st. Previously, companies had to pay a 20% tax on share buybacks. According to the new budget proposal, when a company repurchases shares from investors, it will be taxed, and the payment will be considered as dividend income.

This means that the tax rate on buybacks will change, treating it as a dividend. Companies may need to adjust their financial management plans when planning buybacks under these new rules.

Buyback is a significant financial strategy that can benefit both the company and its shareholders. In 2024, major companies like TCS, Wipro, Infosys, and Reliance have utilized this strategy, proving beneficial for their shareholders. With the new tax policies coming into effect, it will be interesting to see how companies adapt their buyback plans and its impact on their shareholders.
𝙏𝙝𝙖𝙣𝙠 𝙮𝙤𝙪 𝙫𝙞𝙨𝙞𝙩𝙞𝙣𝙜 𝙢𝙮 𝙥𝙤𝙨𝙩. 🙏🇮🇳