What will RIL's share buyback mean for you?

Mark this date on your calendar: 20 January. That’s the day when Reliance Industries, India’s largest company by market capitalisation, will meet to consider a proposal to buy back shares. (It will also announce its quarterly results but that almost seems like a sidebar now.)

News about the buyback led to a sharp surge in RIL’s shares, which rose by as much as 5 percent on Wednesday, increasing share holder wealth by almost Rs 11,963 crore.

But what is a buyback? And what effect does it have on the company and shareholders?

A primer in Business Standard answers those questions and more.

[caption id=“attachment_187478” align=“alignleft” width=“380” caption=“News about the buyback led to a sharp surge in RIL’s shares, which rose by as much as 5 percent on Wednesday.Reuters”]  [/caption]

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To start off, a buyback is the repurchase of the shares of a company by the company from the open market. Companies generally resort to buybacks to raise the value of shares (a buyback reduces supply of shares and hence should improve their prices) and eliminated threats by anyone seeking to acquire a controlling stake in the company (a buyback increases the promoter’s stake in the company).

According to regulations, the repurchase of shares cannot exceed 25 percent of a company’s total paid-up capital in that year.

How do companies pay for these shares? Usually from free reserves, securities premium account etc. Shares can be bought back from shareholders on a proportionate basis or through stock exchanges by a book-building process. ( Read the rest of the article here.)

However, there is no guarantee that a buyback will increase the earnings per share (EPS) nor does it mean that the share price will surge.

As an article in The Hindu notes, “Of the 15 issues, where the buyback window is currently open, the share prices of 14 companies are trading much below the maximum price offered by the company.”

So, one needs to be cautious on share buyback announcements and not get into a buying frenzy without considering all the pros and cons.