{"id":8077,"date":"2023-06-13T11:17:00","date_gmt":"2023-06-13T05:47:00","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=8077"},"modified":"2023-06-13T11:17:00","modified_gmt":"2023-06-13T05:47:00","slug":"buyback","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/","title":{"rendered":"Buyback of Shares Explained in Detail"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Buyback is a practice where a company decides to buy its own shares from investors. They purchase it either from the open market or through a tender. As a result, the number of shares available in the market reduces.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Generally, a company decides to repurchase its shares when it intends to increase the value of remaining shares in the stock market. By opting for this process, a company returns funds to shareholders.\u00a0<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69ea3da44e2b5\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69ea3da44e2b5\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#What-is-Share-Repurchase-or-Buyback\" >What is Share Repurchase or Buyback?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Process-of-Buyback-or-Share-Repurchase\" >Process of Buyback or Share Repurchase\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Example-of-Share-Buyback\" >Example of Share Buyback\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Reasons-For-Share-Buyback\" >Reasons For Share Buyback<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Increase-in-Share-Prices\" >Increase in Share Prices\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Surge-in-Shareholder-Value\" >Surge in Shareholder Value\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Tax-Effectiveness-Benefits\" >Tax Effectiveness &amp; Benefits\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#Better-Utilisation-of-Excess-Cash-in-Hand\" >Better Utilisation of Excess Cash-in-Hand<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/buyback\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-Share-Repurchase-or-Buyback\"><\/span><b>What is Share Repurchase or Buyback?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Buyback or share repurchase is when a business purchases its own shares available in the stock market. There are various outcomes to this process, such as inflation in earnings per head (positive), reduction in the number of shares outstanding in the market, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The shares which are repurchased are cancelled from stock lists and are redistributed in the future. Hence, this process of buyback<\/span> <span style=\"font-weight: 400;\">creates a supply crunch of shares which immediately increases its demand. Moreover, this boost in demand increases the prices of these shares, adding value for shareholders.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Process-of-Buyback-or-Share-Repurchase\"><\/span><b>Process of Buyback or Share Repurchase\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><b>Method 1:<\/b><span style=\"font-weight: 400;\"> In this case, a company may initiate a buyback<\/span> <span style=\"font-weight: 400;\">from an open market. They can do so through a secondary market by contacting their brokers to buy back a large number of shares over a specific period.<\/span><\/p>\n<p><b>Method 2:<\/b><span style=\"font-weight: 400;\"> In other cases, a company opting to buy back some portion of outstanding shares, may issue a tender offer. This tender offer specifies a bid to purchase shares from shareholders and is made public to create awareness. In addition, this offer specifies that share prices and a timeframe open for this buyback program.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The company proceeds with<\/span> <span style=\"font-weight: 400;\">buyback at a fixed price which is over and above the prevailing market value. The effect of this scheme speeds up the contraction of outstanding shares floating in an open market.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Example-of-Share-Buyback\"><\/span><b>Example of Share Buyback\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Let\u2019s consider that a company has 50 lakhs shares outstanding in the stock market and Rs.50 crore as cash. The market value per share is Rs 10. At the beginning of the financial year, a company decides to buy back<\/span> <span style=\"font-weight: 400;\">10 lakhs shares using Rs 1 crore cash from an open stock market. Now, this company has Rs 49 crores as cash-in-hand and 40 lakhs shares outstanding in the share market.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Hence, through this buyback<\/span> <span style=\"font-weight: 400;\">program, a company reinvest in itself using a portion of its excess cash.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Reasons-For-Share-Buyback\"><\/span><b>Reasons For Share Buyback<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Increase-in-Share-Prices\"><\/span><b>Increase in Share Prices\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">One of the pivotal reasons company owners initiate a buyback<\/span> <span style=\"font-weight: 400;\">program is to increase the price of its share in an open market. Sometimes, a company may consider share prices to be undervalued in comparison to competitors. Hence, a company would repurchase some outstanding shares from an open market to decrease the supply of the same.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Eventually, the demand for these shares will increase, accelerating the per unit price of shares. Furthermore, this will establish a profitable condition for the company.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Surge-in-Shareholder-Value\"><\/span><b>Surge in Shareholder Value\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Earning-per-share (EPS) indicates a company&#8217;s level of earning profits concerning the outstanding shares of common stocks. To calculate EPS one needs to divide the company&#8217;s profits by the total number of outstanding common shares. In case it&#8217;s low, companies initiate a<\/span> <span style=\"font-weight: 400;\">buyback program periodically. It decreases the level of these outstanding shares in an open market.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Hence, the shortage of supply and the high-on-demand situation of these shares increases the EPS margin. This further creates a value addition to the existing shareholders of the company. Due to this effect, existing shareholders now possess greater stakes and hold shares that are higher in unit prices.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Tax-Effectiveness-Benefits\"><\/span><b>Tax Effectiveness &amp; Benefits\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The buyback of shares using excess cash-in-hand is a better tax-effective option than initiating dividend payments. Dividend payments attract high tax under the corporate tax regime and companies can avoid it through repurchase. In fact, it is taxed at three different levels.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Stock buybacks, on the other hand, only attract DDT and this amount gets deducted before shareholders get the surrendered earnings.<\/span><\/p>\n<ul>\n<li aria-level=\"1\">\n<h3><span class=\"ez-toc-section\" id=\"Better-Utilisation-of-Excess-Cash-in-Hand\"><\/span><b>Better Utilisation of Excess Cash-in-Hand<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Generally, companies use excess money to buy back shares. This lets existing investors know that there isn\u2019t any shortage of cash inflows to tackle any emergencies. In addition to this, keeping large liquid cash in banks does not offer benefits in the long run. Also, initiating a buyback<\/span> <span style=\"font-weight: 400;\">program rather than reinvesting in alternative assets like private equity, tangible assets, etc., showcases the healthy financial status of a company.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Thus, medium and large-sized businesses often opt for this practice to increase the value of the remaining stocks and surge the profit margin in the long run.\u00a0<\/span><\/p>\n<p><b>The Bottom Line<\/b><\/p>\n<p>While share buybacks are important for businesses&#8217; good financial management, another important factor is the banking platform that businesses use.<\/p>\n<p><span style=\"font-weight: 400;\">One-stop banking solutions platforms like<\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/\"> <span style=\"font-weight: 400;\">RazorpayX<\/span><\/a><span style=\"font-weight: 400;\"> allow business owners to open<\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/?utm_source=direct&amp;utm_medium=website\"> <span style=\"font-weight: 400;\">current accounts<\/span><\/a><span style=\"font-weight: 400;\">,<\/span><a href=\"https:\/\/razorpay.com\/x\/tax-payments\/\"> <span style=\"font-weight: 400;\">pay taxes<\/span><\/a><span style=\"font-weight: 400;\">, schedule payments,<\/span><a href=\"https:\/\/razorpay.com\/x\/vendor-payments\/\"> <span style=\"font-weight: 400;\">pay vendors<\/span><\/a><span style=\"font-weight: 400;\"> seamlessly and check invoices from a single dashboard &#8211; saving valuable time and effort.\u00a0<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x?r=blog_cta_business_banking_buyback&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Explore RazorpayX<\/a><\/div>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>Buyback is a practice where a company decides to buy its own shares from investors. They purchase it either from the open market or through a tender. As a result, the number of shares available in the market reduces.\u00a0 Generally, a company decides to repurchase its shares when it intends to increase the value of<\/p>\n","protected":false},"author":151156542,"featured_media":8078,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[3660,3661],"class_list":{"0":"post-8077","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"tag-buyback","9":"tag-share-buyback"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8077","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156542"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=8077"}],"version-history":[{"count":1,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8077\/revisions"}],"predecessor-version":[{"id":8088,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8077\/revisions\/8088"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/8078"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=8077"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=8077"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=8077"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}