Share buyback: Is the move always worth it?
share buyback price is pre-decided by the company. For every share tendered, investors benefit. In the open market option the company buys back shares from the open market over an extended period.
In the tender offer, investors receive the benefit, as they can sell their shares at a higher price. In the market offer, investors don't benefit, as when an investor places a sell order, there is no clarity on whether shares are accepted under a buyback or sold in the open market. To avoid this, SEBI has decided that it will eventually phase out the second option.
For now, it has made changes for the companies that carry out the buyback via the open market route, according to a research note by icicidirect.com. “I would prefer the tender route instead of open market offer as then it adds more value for the investor," says Chouhan. But is a buyback good? “There are potential downsides to consider," says S Ravi, former Chairman of BSE and Managing Partner of Ravi Ranjan and Co.
“If the company funds the buyback through debt, it could increase its financial leverage, making it riskier for investors. So please study where the company’s management is getting the money from to fund the buyback." Also, if the management's judgment is flawed and the stock price does not perform as expected, investors may face losses. If the company is doing well and there are no options for new acquisitions, it is the best way of using the cash of the company, notes Chouhan.
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