All talk is on the IT bellwether, Tata Consultancy Services popularly called TCS. The TCS Board has cleared a Rs 16,000 Crore share buyback at Rs 2,100 a share. TCS stocks are buzzing.
Now to the big question….Should you take up an offer for buyback of shares? The first thing you must look for in a buyback offer is the size of the offer, the time duration of the offer and the price of the offer. If you get this right, you could make a lot of profits.
Let’s get an idea on buyback of shares. Want to know more on Investment Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
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A buyback of shares is also called a repurchase of shares. In buyback of shares, a Company buys its own outstanding shares, which reduces the number of shares available in the open market. What are outstanding shares? Outstanding shares are the shares of a Company which have been authorized, issued and purchased by investors and held by them.
1. Why do Companies buyback their shares?
Companies go for share buyback as this is a great and efficient way to give money back to the shareholders. So how does this work? When a Company like TCS buys its own shares, fewer shares are left outstanding. This increases earnings per share (EPS), as Company’s net income is spread over fewer shares. EPS is a measure of the profitability of a Company. The price of the shares increase.
SEE ALSO: How To Buy Shares?
A Company buys its own shares and shows it in their financial statements as treasury stock. The Company can sell the treasury stock at a later date if it wants to. If a Company has surplus accumulated cash and no viable options to invest, then this Company goes for a buyback of shares.
Share buyback accounting for Companies
SEE ALSO: 3 Reasons To Sell Your Shares
When a Company goes for a share buyback, it sends a signal to investors that this Company has enough cash on hand. The Company feels it’s better to return the money to investors, rather than reinvest in alternate assets. The Management of the Company feels the share prices are low and need a boost. They feel it’s better to return the money to shareholders as they don’t have commitments like interest payments or any capital expenditure.
Do remember that if you opt for the share buyback, you will lose out on long-term benefits like Dividends and Capital Appreciation.
4. Should you go for share buyback?
The first thing you notice in the share buyback is its size. If the size of the buyback is very small vis-à-vis the Company’s market capitalization, there’s not much impact on the share price. You have to take note of the tax benefits. You and other investors would prefer buybacks to Dividends. Dividend income in your hands attracts an additional dividend tax of 10% on Dividend Income over Rs 10 Lakhs a year. The effective DDT (Dividend Distribution Tax) is 20%.
The profits you get from share buybacks are capital gains. It is STCG (Short Term Capital Gain) if held for less than a year and LTCG (Long Term Capital Gain) if held for more than a year. STCG is taxed at 15%. LTCG of more than a Lakh will be taxed @10% without the indexation benefit.
You need to remember that a Company buys back only a certain percentage of its outstanding shares from the public. You must weigh all the pros and cons before opting for share buyback. Be Wise, Get Rich.
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