Share buyback or repurchase is the practice where companies decide to purchase their own share from their existing shareholders either through a tender offer or through an open market. In such a situation, the price of concerning shares is higher than the prevailing market price.

When companies decide to opt for the open market mechanism to repurchase shares, they can do so through the secondary market. On the other hand, those who choose the tender offer can avail the same by submitting or tendering a portion of their shares within a given period. Alternatively, it can be looked at as a means to reward existing shareholders other than offering timely dividends.

However, company owners may have several reasons for repurchasing their stocks. Individuals should make a point to find out the underlying causes to make the most of such decisions and also to benefit from them accordingly.

There may be several reasons why a company opts for a stock buyback. However, the list below highlights the most common reasons for the same.

When There Is Excess Cash but Not Enough Projects to Invest In

Companies issue shares to raise equity capital and expand their venture, but often such a practice does not prove to be of much use. Similarly, keeping excess money at the bank is more like a truncated cash flow offering liquidity over the ideal requirement. Hence, instead of piling on cash reserves, companies with robust financial standing tend to make the best possible use of the cash available through a stock buyback.

It is a Tax-effective Rewarding Option

When compared to dividends, share buybacks are more tax-effective for both companies and their shareholders. To elaborate, stock buybacks are subjected only to DDT, and the amount of money is deducted before distributing the earnings to the surrendering shareholders. On the other hand, dividends are taxed at 3 different levels.

To Consolidate Hold Over the Company

Often when the number of shareholders of a company exceeds the manageable limit, it becomes challenging for the entity to reach a decision unanimously. Additionally, it may result in a power struggle within the company and among the shareholders with voting rights. To avoid or aggravate such situations, company board members often resort to share buybacks and plan to consolidate their hold over the company by increasing their voting rights.

For instance, OYO Rooms’ attempt to repurchase shares worth $1.5 billion from Lightspeed and Sequoia Capital is one of the most recent examples of buyback of shares in 2020. The success of such a proposal would increase the company CEO’s current shareholding from a meager 10% to 30% and strengthen his hold over the company.

To Signal that the Stock Is Undervalued

When a company decides to buy back its shares, it may also indicate that the company considers its shares to be undervalued. Besides serving as a remedy for the situation, it also helps to project a positive picture of the company’s prospects and its current valuation.

Other than these, stock buybacks may be prompted to improve companies’ overall valuation or to reward their existing shareholders.

The following pointers highlight what are buybacks impacts that are faced by a company’s different financial aspects.

Effect on Earnings Per Share (EPS)

Repurchasing a company’s shares lays a direct impact on its EPS by increasing the ratio significantly. It mainly happens because the net income tends to remain the same, while the total number of outstanding shares reduces post repurchasing.

Effect on Financial Statement

The money spent to repurchase company stocks would be recorded in the business’s earnings report and can also be found in the statement of cash flow under the head ‘financial activities as well as the statement of retained earnings.

Besides influencing the income statement of a company, the impact of share buybacks can be noticed in other financial statements as well.

For instance, in the Balance Sheet, the record of a company’s cash holding would reduce and in turn, would lower its total assets. Simultaneously, the amount of shareholder’s equity would also undergo a reduction. Notably, such a reduction would help improve performance metrics like Return on Equity (ROE) and Return on Asset (ROA).

Effect on the Company’s Portfolio

Usually, companies who have faith in their prospects indulge in the practice of repurchasing their company shares. Such a display of confidence is received positively by potential investors and existing shareholders and helps earn their trust significantly. In turn, it helps the company to enhance its market reputation and facilitates an increase in its share value naturally. All of this directly helps improve the venture’s portfolio significantly.

Effect on Increasing Shareholder Value

Business owners who opt for share repurchase are more likely to enhance their EPS significantly, and that too much faster than operational improvements. Investors scouting for profitable investment options tend to acknowledge companies with steady EPS as a better income-generating avenue with enhanced growth potential.

Further, it is believed that companies who are capable enough to repurchase their shares from shareholders have a grand market presence and robust pricing power. Hence, the practice of share repurchase not only helps to project a positive image of the company in the market but also comes in handy for potential investors.

Investors often believe that the declaration of upcoming buyback of shares signifies that the company’s prospect is profitable. Further, it is believed to influence the overall stock price of the company. For instance, investors often believe that repurchasing shares from shareholders is a probable indication of the acquisition of big companies, the launch of new and improved product lines, etc., among others.

All in all, it can be said that share buyback signifies that the stock valuation of a company is going to increase shortly. Notably, hinting at such positive prospects further helps to draw the attention of investors who wish to make the most of such favourable circumstances.

Regardless, certain companies may resort to this practice when their stock valuation decreases. It is mainly done to prevent their capital from eroding further.

As a means to identify the actual motive behind the stock buyback, investors should factor in a few things like the current trends in stock prices and current earnings per share. Additionally, it will help them understand the implications of such a decision.

Yes, customers applying for Buyback through ICICIdirect will be charged cash brokerage as per their mapped brokerage plan. GST and other statutory charges will also be charged

You can check the upcoming Buybacks in the below mentioned link

https://www.icicidirect.com/ipo/buybacks

When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.

Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices.

Usually when the stock split is announced, the price of the stock increases. Investors might profit from this in an ideal world. But trading on knowledge of stock split before it is publicly disclosed is insider trading.

Prior to stock split record date, the stock generally rises due to increased demand, and following the ex-split date the price declines in accordance with the split ratio and may drop even further if many investors choose to book profit.

A Follow-on Public Offer (FPO) is a type of public offer in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors.

It is different from an IPO where the company issue its shares to its public for the first time to collect funds in order to grow their business.

The reason behind the company performing an FPO is to expand its equity base. The company uses FPO only after the company has started the process of an IPO to make their shares available to the public and to raise capital for their business.

The FPO can be raised for many reasons like, financial expansion, paying off debt, or funding acquisition.

There are two different types which a company can conduct Follow on Public Offer (FPO):

1) Dilutive FPO

2) Non-Dilutive FPO

Dilutive FPO

In dilutive FPO, the company issue additional number of shares but the price value of the company’s share does not change and remains the same. These overall decreases reduction in earnings per share as well as the share price.

Here, the company’s board releases new share offerings to the public. However, an FPO is used by a company only to reduce the debt or to raise additional capital of the company.

Non-Dilutive FPO

Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company.

Thus, the per-share earnings of the company does not get affected.

The share price issued in an FPO is lower than the prevailing market price. The primary motive behind issuing shares at a lower price is attracting and getting more subscribers to its issue.

However, lower demand of the share price instantly lowers the market price and levels it with the FPO issue price.

FPO is generally considered an advantage compared to IPOS because investors get an idea about the company's management, business practices, and potential growth.

The company listed on the stock exchange is not new, and investors will get the historical reference for its earnings report, the performance of the stock market, and much data to bank on.

FPO tend to have less risk than IPO because the price fixed for an IPO is lower than the market price to attract shareholders to invest more in FPO.

Several shareholders engage in the FPO to buy shares at a discounted market price and sell them in the market to gain a premium on their transaction.

A lot of research is required in FPO to know about the company and its past performance, but the degree of homework in FPO is a lot easier.

Hence it goes well for risky investors and gives them an opportunity to access shares of a company at a discounted price.

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding. For instance, if Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will increase to 1000 shares.

Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

According to bonus number of shares issued in the bonus share, the stock price gets adjusted. Consider a business where a business announced a 4:1 bonus issue. Share priced at Rs. 100/- each before bonuses. If there are 100 shares then:

(100 x 100) / 400 = 25for the stock price following the bonus issue.

The shares are credited in case of a bonus issue a few days (normally 15 days) after the ex-date. Thus the investor is unable to sell the share before it is credited to his demat account because doing so could result in an auction.

It is advantageous for the company’s long-term shareholders how wants to increase their investments. Because the company uses the cash for business growth, bonus shares increase the investors’ confidence in the company’s operations.