Things to know about share buyback & how you can earn from it

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If you invest in stock markets, you must have surely come across the word buyback. But have you ever wondered how can you generate returns from them? Well if not, then read on to understand the nuances of buyback.

Buyback: Buybacks are nothing but just the opposite of an IPO. In an IPO company issues shares to the public whereas in a buyback the company repurchases its shares from existing shareholders.

Types of buyback: There are two common methods in which a company buys back shares are either through a tender offer, or an open market. In a tender offer, the company buys back its shares from the existing shareholders at a fixed price on a proportionate basis within a given time frame.

Whereas in the case of buyback of shares from the open market, a company buys back the shares from the stock exchanges having nationwide trading terminals via an order matching mechanism.

Buyback offer price: The price at which a company is willing to buyback its shares from existing shareholders via the tender offer route. You can take help of established platforms like 5Paisa to know about companies which are offering buyback shares. Through 5Paisa you can get all the information which is needed to start your journey.

Usually, the offer price is higher than the price at the stock is trading on the bourses.

In the open market mechanism, the company buybacks shares at prevailing market rates upto the offer price.

Retail investor reservation: The Securities and Exchange Board of India (Sebi) mandates that a 15% reservation be made for small retail investors in buyback offers on the record date.

Entitlement ratio: The entitlement ratio is nothing but the ratio of shares a retail investor has offered in the buyback compared to the total number of shares held in the overall retail investor category.

It is calculated as the total number of shares offered by investors at the close of the offer divided by the total number of retail shareholders. While retail investors are free to tender all the shares that they hold in the offer, it is not necessary that they will all be accepted.

Acceptance ratio: It is the number of shares will be able to accept in a buyback offer as compared to the total number of shares tendered.

Money making: Retail investors can use the buyback opportunity to tender their existing shares or buy new shares which may be trading at a value lower than the offer price. The more shares accepted at the offer price, the higher the benefit for the shareholder.

Important dates: To be able to participate in a buyback via the tender offer route process, the investor should be have held the shares of the company before the record date declared by the company in its announcement for buyback. The shares should be held in demat form.