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.

You can check the upcoming Buybacks in the below mentioned link

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

Right issues are an offer made by a company to its shareholder to purchase additional shares of their stocks by a certain date at a certain price. These are typically offered at prices that are lower than the price to pique interest

There are 4 ways to apply for Rights Issue:

1. Login to your ICICI Direct web account > Click on IPO section > Click on Rights Issue > Apply
2. Online through ASBA (Applications Supported by Blocked Amount) if your bank supports it just like you do for an IPO. Most large banks including Axis, HDFC, ICICI, SBI, Kotak support this method.
3. Online through the RTA (Registrar and Transfer Agent) website.
4. To apply offline:-
• Click on the link - https://www.bseindia.com/publicissue.html
• Download the application form
• Filled the form and submit it to a Self-Certified Syndicate Bank (SCSB) branch (WEB).

Advantages of right issue:

• The company’s reputation improves as it exhibits growth and demonstrated long term commitment to serve customers by introducing a right issue feature.
• Existing shareholders become major controllers
• Quickest method of raising money

The rights shares can be renounced by participating in the rights entitlement trading platform of the stock exchange known as an on-market renunciation or by way of off-market transfer known as off-market renunciation.

In the case of on-market renunciation, the settlement of rights entitlement happens similar to equity stock on T+2. The on-market renunciation can offer better pricing opportunities based on the demand and supply of the RE in the market.

In the case of off-market renunciation, the pricing will be decided mutually by both parties. The off-market renunciation can be done till the issue closure date, unlike on-market renunciation which closes 3-4 before the issue closure date

If a customer neither apply in rights issue nor renunciate his rights entitlement the same will get laps. This is a financial loss to the customer.

You can check the upcoming Rights Issue in the below mentioned link

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

No, Customer with corporate account cannot apply in rights issue online.

Corporate account customer has to submit the duly filled Rights Issue form along with the following documents at the designated bank branches with demat desk : 

1. Power of Attorney
2. Memorandum of Association
3. Copy of Board Resolution
4. Company PAN
5. List of Authorized signatories

You can download the form from the below link

https://www.bseindia.com/publicissue.html

The renunciation of rights entitlements is the process of renouncing or transferring or selling the rights to other interested investors at a better price.

When a shareholder is not interested in the rights entitlements offer given by the company, he can choose to renounce his rights rather than let it lapse. The renunciation of rights entitlements can happen either by way of rights entitlement trading or off-market transfer.

There are two ways of renunciation:

1. On-Market Renunciation - This is the rights entitlements trading platform of the stock exchange wherein the rights can be renounced on the exchange floor at a better price. The on-market renunciation can happen only till the last date of the rights entitlement trading which is generally 3-4 working days before the issue closing date.
2. Off-market renunciation - In this case, the interested buyer and seller can mutually agree on the price and complete the renunciation off-market. The off-market renunciation can be done until the issue closure date however it should be done in such a way that the renounce has sufficient time to apply for the rights issue before the issue closure date.

Current shareholders have the chance to increase their ownership in a company at a discounted price through a right issue. By doing this, they increase their exposure to a company’s stock, which may or may not be advantageous depending on the profit or loss statement of the company.

Rights issue can lower a stock’s value and decrease trading volume, both of which have an impact on the share price. By adding more shares, stock prices become diluted and there may be a downward trend in share valuation.

Rights issue frequently result in increased interest in (and trading volume on) those shares, which frequently has a significant impact on trading activity on the day they are announced.

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.

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.