The buyback conundrum

Once your shares are bought back, you will no longer be entitled to future dividends, bonus issues, or other corporate benefits on those shares

- RAGHU PALAT

ON NOVEMBER 14, two companies, GHCL and Infosys-both highly regarded entities-offered to buy back their shares from existing shareholders.

While GHCL is attempting to buy back shares totalling ₹300 crores, Infosys proposed a significantly higher buyback aggregating ₹18,000 crore. To entice shareholders to offer their shares for repurchase, Infosys is offering a 16% premium of its current price while GHCL is offering a premium of 14%.

At first glance, many investors may be tempted to participate in the buyback to capture this immediate gain. However, before taking advantage of what appears to be a lucrative opportunity, it is essential to understand what a buyback actually entails.

What is a buyback?

It is the repurchase of its own shares by the company that originally issued them. Once the company buys its shares back, it can either hold those as treasury shares and offer them to employees at the time stock options are given or cancel them to reduce its total outstanding issued share capital.

Companies seldom initiate buybacks because they have exhausted their authorised share capital. If a company already has sufficient shares available for employee stock options, why would it still choose to buy back its shares? The explanation lies in the strategic purposes that buybacks are designed to serve.