Depending on the circumstances, investor benefits would vary depending on whether the exercise is done through tender or open market offer.
A falling market might be depressing for investors. For promoters, it is an opportunity to raise their stake. November saw the Sensex hit a two-year low; it has had 13 companies filing documents with the Securities and Exchange Board of India for buyback offers.
Buyback of shares means repurchase using surplus cash in the balance sheet. The company's share capital reduces to the extent of shares bought back, raises promoter holding and improves earnings per share. Shareholders can participate either through the tender offer route or by selling shares in the open market, as may be decided by the company.
A buyback can be through various methods.
The first is through a tender offer, where the company makes an offer to buy a certain number of shares at a specific price, directly from shareholders. This route ensures all shareholders are treated equally, no matter if they hold a majority or a minority stake.
The other route is to make purchases in the open market, where the company acquires a certain number of shares. The company fixes a maximum price and can buy back the shares anywhere up to that particular price. Most companies prefer using this route to buy back their shares.
The biggest difference between the two is that in a tender route, the price of the buyback is fixed.
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This route carries certainty on price and quantity parameters. In the open market route, the benefit to a shareholder cannot be accurately judged, since the company could have bought shares at a lower rate.
It isn't possible to always exit at the 'maximum' price the company is willing to buy. It simply provides updates on the number of shares bought.
Investors who sell their shares in a tender route will have to pay tax according to their applicable brackets. "Since you do not pay Securities Transaction Tax in the tender route, there is no tax relief for investors.
| THE TWO MODES | ||
| Parameters | Open market buyback offer | Tender offer buyback |
| Price | Maximum price is fixed; shares can be bought back anywhere up to that price | Buyback price is fixed |
| Shares bought back | Number of shares to be bought back is fixed | Number of shares to be bought back is fixed |
| Duration | Buyback programme can go on for up to a year | Buyback programme can go on up to a month |
| Transaction costs | Transaction costs are higher by between | Transaction costs don’t include brokerage and advertising costs are |
| * Buyback of shares means repurchase using surplus cash in the balance sheet. It can be through various mathods | ||
| * The firm's share capital reduces to extent of shares bought back, raises promoter holding and improves earnings per share | ||
| * Shareholders can participate either through tender offer or by selling shares in the open market, as may be decided by the firm | ||
It will be treated as business income. Whereas, in the open market route, the seller will only have to incur short-term or long-term capital gains tax, depending on how long you have been invested in the company," explains Dara J Kalyaniwala, vice-president, investment banking, PL Capital Markets.
From a cost angle, the difference is significant, says Rajnish Rangari, country head-investment banking, Karvy Investor Services, up to 10-15 per cent.
The different transaction costs involved in a buyback offer are managers' fees, payment of deposit, brokerage, advertising costs and lawyer fees.
“In the tender route, the investor does not have to pay brokerage. Advertising fees will be lesser in the tender offer, since the offer period is less in this case,” says Rangari.
“An open market buyback offer can go on for a year, whereas a tender offer lasts up to a month."