Understanding Share Buybacks and How Retail Investors Can Benefit

Share buybacks have gained significant attention in the investment community, especially among retail investors eager to boost their returns. But what exactly is a share buyback, and how can it benefit you as an investor? This guide will clarify the concept of share buybacks, their implications, and how you can actively participate, drawing on the example of Infosys' buyback in 2022.

What is a Share Buyback?

A share buyback, or stock repurchase, happens when a company buys back its own shares from existing shareholders. This typically occurs at a fixed price that is often higher than the current market price. Companies usually engage in buybacks for several reasons:

1. Rewarding Shareholders: By repurchasing shares, companies can return excess cash to shareholders, offering immediate returns.

2. Reducing Share Supply: A buyback decreases the total number of shares available in the market. For instance, when fewer shares are available, this can drive up the share price due to increased demand.

   
   

3. Demonstrating Financial Strength: Engaging in a buyback signals that a company is financially strong and has extra cash to reinvest in itself.

   
   

4. Improving Financial Ratios: Buybacks can enhance key financial metrics like Earnings Per Share (EPS), making the company appear more appealing to investors. In fact, companies that conduct buybacks often see their EPS increase by an average of 10% according to market analyses.

   
   

Example: Infosys Buyback (2022)

In 2022, Infosys launched a buyback of shares worth ₹9,300 crores at a fixed price of ₹1,850 per share. When this announcement came, Infosys shares were trading lower on the stock market, providing shareholders an opportunity to sell their shares directly to the company at a premium. This buyback not only delivered immediate returns to shareholders but also underscored Infosys' strong financial status. In fact, during that period, shares of Infosys rose by 7% shortly after the buyback announcement.

How Does Buyback Happen in India?

In India, there are two primary methods through which companies conduct share buybacks:

Tender Offer Method

In the tender offer method, the company sets a fixed buyback price. Eligible shareholders can tender (offer) their shares within a specified buyback window. The company will accept shares based on a set ratio, depending on how many shareholders apply. This method is often favored by retail investors because it offers a clear, fixed price.

Open Market Method

The open market method involves the company buying shares directly from the stock exchange at market prices, but within a predetermined price cap. This method can be somewhat unpredictable for investors, as the price at which shares are bought back can fluctuate.

Why Choose the Tender Offer Method?

The tender offer method tends to be more advantageous for retail investors. It provides a fixed price, allowing investors to know exactly what they will receive for their shares. For example, during the Infosys buyback, knowing the buyback price ahead of time allowed shareholders to make informed choices about whether or not to sell their shares back to the company.

How to Apply for Infosys Buyback in Zerodha

If you are a retail investor wanting to take part in the Infosys buyback, follow this simple guide to do it through Zerodha, one of India's leading trading platforms.

1. Check Eligibility

First, ensure you are eligible. The company will announce a record date, and if you hold Infosys shares in your demat account on that date, you can participate in the buyback.

2. Apply in Zerodha Console

Once you confirm your eligibility, proceed as follows:

• Log in to your Zerodha Console.

• Go to Portfolio → Corporate Action Order Window.

• If eligible, you will see an option for the Infosys Buyback.

• Click on it and enter the number of shares you wish to tender. You can offer all or some of your eligible shares.

• Confirm your order.

  
  

Tip: You can tender more shares than the company will ultimately accept. Any extra shares will simply be returned to your demat account.

3. Acceptance Ratio

The acceptance ratio is determined by how many shares are tendered by all eligible shareholders. Not all shares tendered may be accepted, but you'll be notified of the final acceptance ratio once the buyback concludes.

Benefits of Participating in a Buyback

Participating in a share buyback can provide several advantages for retail investors:

1. Immediate Returns: Selling shares back to the company at a higher price can yield instant cash returns. For example, selling 50 shares at a premium of ₹1,850 can lead to a return of ₹92,500.

   
   

2. Potential for Increased Share Value: Reducing the number of shares in circulation can lead to a higher share price over time. Often, firms that conduct buybacks see an average increase in share price of about 20% within six months.

   
   

3. Confidence in the Company: A buyback generally indicates that the company is optimistic about its future prospects, adding reassurance for investors.

   
   

Final Thoughts

Share buybacks can be a strategic opportunity for retail investors to enhance their returns and strengthen their confidence in the companies they invest in. Understanding how buybacks operate, particularly within the context of the Indian market, can empower you to make informed investment decisions.

By using the steps outlined in this guide, you can take part in buybacks like the one offered by Infosys and potentially enjoy the benefits of this financial strategy. Always remember to do your research and consider your investment goals before participating in any buyback program.

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