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INVESTMENT BANKING

The document provides an overview of share buybacks, detailing the process, criticisms, and impacts of this financial strategy. It explains how companies repurchase shares to increase the value of remaining shares and improve financial metrics, while also addressing concerns about short-term focus and wealth inequality. The conclusion emphasizes the popularity of buybacks as a tool for enhancing shareholder value and financial confidence.

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0% found this document useful (0 votes)
9 views10 pages

INVESTMENT BANKING

The document provides an overview of share buybacks, detailing the process, criticisms, and impacts of this financial strategy. It explains how companies repurchase shares to increase the value of remaining shares and improve financial metrics, while also addressing concerns about short-term focus and wealth inequality. The conclusion emphasizes the popularity of buybacks as a tool for enhancing shareholder value and financial confidence.

Uploaded by

bhushannichite
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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VIGNAHARTA TRUST

SHIVAJIRAO S. JONDHLE COLLEGE OF


ENGINEERING & TECHNOLOGY,
ASANGAON
UNIVERSITY OF MUMBAI

Subject: INVESTMENT BANKING

“INTRODUCTION TO SHARE BUYBACK”


MASTER OF MANAGEMENT STUDIES
SEMESTER – III
2024-2025

1
INDEX

CHAPTER NO PARTICULARS PAGE NO

1 Introduction 03

2 Process, Criticism & 04 - 07


Impacts on Buyback

3 Conclusion 08

4 Bibliography 09

2
Introduction

Introduction To Share Buyback

Share repurchasing or the buyback of shares meaning is when


a company purchases back its outstanding shares to reduce the
number of shares available in the open market.
There are multiple reasons why companies tend to buy back
shares like increasing the value of the remaining available
shares by reducing their supply or as an attempt to prevent
any other shareholder from taking a controlling share.
Repurchasing the shares available in the market reduces the
number of outstanding shares. Later, the earnings per share
inflate along with the stock price. A share buyback is also an
attempt by the company to demonstrate to its investors that it
has sufficient liquidity for emergencies.

3
Process of Buyback

1. Authorization: The maximum number of shares to be


repurchased and the window of time during which these
repurchases shall take place are decided by the board of
directors, who also approve the buyback program.
2. Announcement: The company notifies the public about the
buyback program, describing its objectives, the maximum
number of shares that will be acquired, and the anticipated
completion date. This guarantees openness and communicates
the company's goals to the market and shareholders.
3. Involvement of Intermediaries: It is possible to get
guidance from financial intermediaries regarding the quantity
and schedule of repurchase transactions. These intermediaries
assist the business in navigating the marketplace and carrying
out buyback deals successfully.
4. Market Monitoring: To find appropriate chances for share
repurchases, the company keeps an eye on the state of the
market, including factors like transaction volumes and price
patterns. This helps in maximizing the buyback transactions'
timeliness.
5. Execution of Transactions: In response to opportunities
they see, intermediaries can conduct buyback transactions on
the open market or engage in private negotiations with
shareholders. This means acquiring shares in accordance with
the guidelines specified in the buyback scheme.
6. Compliance and Reporting: By legal obligations and
disclosure obligations, the company updates shareholders on a

4
regular basis during the buyback process. This guarantees
accountability to stakeholders and openness.
7. Finalization: The public is informed by an announcement
made when the buyback program comes to an end. This
statement details if authorized shares have been repurchased
or if the program's expiration date has passed.
8. Effect on Financial Statements: The number of
outstanding shares decreases when repurchased shares are
recorded as treasury stock. Since the updated number of
outstanding shares is used to compute financial metrics like
earnings per share (EPS) and return on equity (ROE), this
influences such metrics.

Criticism of Buybacks

1. Lack of Investment: Businesses are accused of hiding poor


results or underinvesting in research, development and
infrastructure through buybacks.
2. Inequality: Opponents argue that because buybacks favor
rich executives and shareholders at the expense of employees
and other stakeholders, they increase wealth inequality. This is
because buybacks frequently result in stock price increases,
which mostly help individuals who possess significant
interests in the company.
3. Cash Allocation: Considering the company's debt and
other growth prospects, some people wonder if buybacks are
the best use of a company's cash. Some who oppose
corporations buyback policies contend that long-term value
5
creation should take precedence over short-term financial
engineering.
4. Tax Treatment: In many jurisdictions, buybacks are taxed
more favorably than dividends, which some claim affects
capital allocation decisions. Rather than because buybacks are
the optimal long-term value creation strategy, companies may
choose them over alternative types of capital distribution to
shareholders only because they are more tax-efficient.
5. Short-Term Focus: Some argue that because buybacks
give short-term stock price increases precedence over long-
term investments in growth and innovation, they promote a
short-term emphasis among executives and shareholders. This
focus on the here and now could make it more difficult for a
business to build value over the long run.

Impacts of Buyback
1. Executive Pay: Buybacks have the potential to raise stock
prices, which is beneficial for executives whose pay is based
on success in the stock market or on metrics like earnings per
share (EPS). Higher CEO pay might come from this, which
would raise questions about alignment with shareholder
interests and the possibility of excessive compensation.
2. Investment in Growth: Critics believe that buybacks could
limit a company's capacity for innovation and expansion by
taking funds away from long-term growth initiatives like
capital expenditures or research and development. Future
prospects and the company's ability to compete may be
hampered by this.

6
3. Shareholder Value: By raising stock prices and EPS
(earnings per share), buybacks may increase shareholder
value. Buybacks can improve the supply-demand dynamic for
the company's stock by lowering the number of outstanding
shares, which could increase investor returns.
4. Market Perception: The way the market reacts to
buybacks can affect how investors feel about the firm and
how they view it. Reactions to buybacks that are favorable,
such as heightened optimism about the company's financial
standing and prospects, can raise stock prices and sustain
long-term shareholder value. On the other hand, unfavorable
responses could make people wonder about the company's
intentions and capacity for wise capital allocation.
5. Long-Term Value Creation: How well a company
manages its resources and captures growth chances will
determine how buybacks perform in the long run. The
company's capacity to generate sustainable growth and make
strategic decisions will determine if buybacks are sustainable
and contribute to long-term wealth creation, even though they
can offer short-term benefits like EPS growth and stock price
appreciation.

7
Conclusion

Companies use this as a financial tool to repurchase their


stock in the open market. Due to its capacity to grow financial
measures, increase shareholder cost, and convey self-
assurance about the corporation's prospects, this approach has
won popularity. Buybacks can increase the earnings in
keeping with proportion and provide shareholders their money
back using lowering the range of excellent shares.
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8
Bibliography

Wikipedia

www.investindia.gov.in

9
Thank You

10

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