What is Share Buyback/Repurchase?

A share buyback is when a company buys its own shares, reducing the number in the market. This can increase EPS and may boost the value of remaining shares.

OPEN ACCOUNT

What is Share Buyback/Repurchase?

OPEN ACCOUNT

3 mins read

06-June-2025

A share or stock buyback is a corporate initiative in which a company repurchases its own shares from current shareholders. This may be carried out via a tender offer or by acquiring shares directly from the open market. Usually, the buyback price is set above the prevailing market price to incentivise participation.

Example of a buyback

Despite delivering strong financial results over the year, a company's stock has lagged behind its competitor's performance. To reward shareholders and enhance investor value, the company launches a share buyback programme, aiming to repurchase 10% of its outstanding shares at the prevailing market price.

Reasons for share buyback

Consolidating control: Share buybacks can help businesses consolidate control when the number of shareholders increases, which can lead to decision-making challenges and power struggles. Companies aim to strengthen their hold over the organisation by repurchasing shares, particularly beneficial for management and key stakeholders.
Using excess cash: Businesses may opt for stock buybacks to make efficient use of available funds when they have surplus cash but limited investment opportunities. This allows them to prevent excessive accumulation of cash reserves, providing liquidity beyond requirements.
Signalling undervaluation: The decision of a company to repurchase its shares may signify that it considers its stock to be undervalued. This action addresses undervaluation concerns and portrays a positive outlook on the prospects and current valuation of the business.
Tax efficiency: Compared to dividends, stock buybacks provide tax advantages for shareholders and businesses. Buybacks are subject to dividend distribution tax (DDT), subtracted prior to distributing earnings to shareholders, whereas dividends face taxation at multiple levels.
Other motivations: Stock buybacks may also be considered to enhance the overall company valuation and reward existing shareholders.

Impact of share buyback

Share buybacks directly impact Earnings Per Share (EPS) by increasing it, as the net income remains unchanged while the number of outstanding shares is reduced after repurchase.
The cost of repurchasing shares is reflected in the company's earnings report and appears in the cash flow statement under financing activities and in the statement of retained earnings.
In the balance sheet, a reduction in cash holdings post-buyback decreases total assets and shareholder equity, improving key financial ratios like Return on Equity (ROE) and Return on Assets (ROA).
Companies that buy back their own shares often signal confidence in their future prospects, which tends to build investor trust, enhance market reputation, and naturally boost share value.
Share repurchase enables companies to boost EPS more rapidly than through operational gains, making them attractive to investors seeking stable and potentially high-growth investments.
Firms capable of conducting share buybacks are often seen as having strong market standing and pricing power, which helps project a favourable image and appeals to potential investors.

Buyback share process

Step 1: Board approval
The company’s board of directors convenes to evaluate and approve the share buyback proposal for strategic or financial reasons.
Step 2: Announcement
Following board approval, the company issues a public announcement detailing the buyback plan, including the method (open market or tender), buyback price, record date (if applicable), and timeline.
Step 3: Execution
Open Market: The company repurchases shares directly from the open market, targeting free-float shares without relying on specific retail shareholder holdings.
Tender Offer: A record date is fixed. Eligible retail shareholders can apply for buyback within a specified period, as stated in the disclosure document.
Step 4: Payments
If shares are accepted: Payment for accepted shares is credited to the investor's registered bank account linked to their demat account within the stipulated timeline.
If shares are rejected: Rejected shares are unblocked immediately and can be freely traded in the open market.
Step 5: Reporting
Upon completion, the company informs regulators and shareholders with a report on the buyback, including details like the entitlement ratio and number of shares repurchased.

What are the consequences of share buyback?

The following points signify what is buyback and how it impacts a business’s different financial aspects:

Effect on earnings per share (EPS) enhancement: Repurchasing shares directly boosts the EPS of a company by reducing the total number of outstanding shares, which helps maintain net income.
Portfolio strengthening: Share repurchases indicate confidence in the prospects of a company, which improves market reputation and fosters trust among investors. Naturally, this enhances share value and enriches the portfolio of the company, attracting potential investors.
Shareholder value upsurge: Investors seeking reliable income sources can get attracted towards EPS augmentation through buybacks that outpace operational improvements. Businesses capable of repurchasing shares are seen as market leaders with strong pricing power, enhancing their appeal to investors seeking profitable investments in shares and debentures.
Impact on financial statements: Funds spent for stock buybacks are reflected in the earnings report and cash flow statement under ‘financial activities’ and retained earnings of the business. This impact also extends to other financial statements.

Concluding thoughts

Share buybacks play a significant role in shaping investor perceptions and influencing stock market dynamics. Investors may struggle to comprehend what is buy back in the share market; however, understanding the practice is important as it potentially impacts stock prices. In general, share buybacks remain a key strategy for companies to enhance shareholder value, manage capital, and navigate the complexities of the stock market.

Frequently Asked Questions

A share buyback is generally seen as a positive move. It can indicate the company’s confidence in its financial health, reduce the number of outstanding shares, improve financial ratios like EPS, and potentially increase share value. However, its benefit depends on timing and execution.

In a tender offer, you can apply to sell all your shares, but the actual acceptance depends on the entitlement ratio and total investor response. In an open market buyback, the company selects the quantity and timing, so there is no guarantee that all your shares will be bought.

The buyback price is usually predetermined and disclosed by the company during the announcement. It is often set above the current market price to encourage participation. Investors don’t calculate it themselves but can compare it with the prevailing market price to assess value.

You only lose (or rather, sell) your shares if you voluntarily participate in the buyback offer and your shares are accepted. If you don’t participate or your shares aren’t accepted, you retain ownership as usual.

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