Why companies buy back shares
1.Companies with excess cash in their books and not enough investment or business opportunities buy back shares using their reserves and surplus.2.Companies buy back shares when the price falls without any fundamental reason so that they can build investor confidence and indicate that the company is undervalued.
3.As buying back of shares results in a fall in the number of outstanding shares, it can lead to increased earnings per share and, in the future, higher dividend per share.
4.Since buyback is an offer and shareholders can choose to accept or reject it, promoters can forfeit the offer and increase their stake in the company.
5.Buyback results in longterm capital gains, compared to dividends, which are taxed at marginal rate and can be tax-effective for people in higher tax brackets.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
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This story originally appeared on: India Times - Author:Faqs of Insurances
