Let us begin by understanding what a buyback offer. Buyback of shares is the term given to situations wherein the company repurchases its shares from current shareholders. Therefore, companies that had earlier issued shares pay some of their shareholders and absorb that part of the ownership several investors had before.
There are multiple options available through which a company can buy back its shares. Let us understand what they are:
Applying for a buy back of shares in India is a simple process. However, the first step is to verify if you are qualified to participate in the process. The record date is a critical factor that decides whether you are eligible for a share buyback. Companies typically set a record date for the buyback offer, which is like a cut-off date. So, if you have purchased shares after the record date, you will not qualify to participate in the offer.
Another key term used during buybacks is the acceptance ratio. An acceptance ratio comprises the percentage of shares a company is willing to buyback from a specific investor. Suppose you hold ten shares of a company. According to the acceptance ratio, the company might purchase only five shares from you.
A Demat account serves as a repository to store your purchased securities. When you sell some of your securities, they get removed from your Demat account. Similarly, you can use your Demat account to participate in a share buyback. Let us now understand the buy back of shares procedure:
(i) The number of shares you hold of the company on the record date.
(ii) The number of shares that fit the buyback eligibility criteria.
(iii) The number of shares you are applying for the buyback process.
There can be several reasons that can drive companies to repurchase their shares, some of which are discussed below:
Earnings per share (EPS) is a crucial metric that investors use to evaluate a company’s financial well-being. It is determined by dividing a company’s earnings by its average outstanding shares. By repurchasing their own shares, companies may reduce the value of the total shares, thereby lowering the value in the denominator for EPS calculation. As a result, the company may present a better EPS value and look more attractive.
Companies seeking to repurchase a portion of their issued shares may repurchase them from the existing shareholders through a share buyback process. Retail investors with a Demat account and holding shares before the record date are eligible to participate in the process.
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