Mint Explainer: When and why do companies buy back their shares?
₹10,000 crore buyback (3.33 crore shares). A retail investor, defined as one holding up to ₹2 lakh of a company’s shares, can buy 66 shares of L&T (3000 x 66 < ₹2 lakh), rounded off for convenience. At Thursday’s closing price of ₹2,660, the offer of ₹3,000 is at a 13% premium, which is an attractive proposition .
However, not all shares will be bought back. The company will declare an acceptance ratio, which is the proportion of shares tendered by a shareholder that it is willing to buy back. Assume you buy 66 shares at the 27 July closing of ₹2,660.
You pay ₹1,75,560. Now, if L&T sets a 60% acceptance ratio, the number your of shares it will accept is 40 (rounded off) . The amount you will receive on shares accepted is ₹1.2 lakh (40 x 3000).
The number of shares returned would be 26 and their cost would be ₹55,560 (1,75,560 - 1,20,000), making the effective cost per share ₹2,137 (55560/26) . This is the breakeven price of the share . If L&T falls to this price after the buyback, you won’t make any money.
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