TCS to consider buyback: All you need to know about buyback of shares

After Cognizant, now TCS board said that it would consider buyback of equity shares. Since then there is a lot of buzz about buyback as the option available to the cash rich companies. So what is

“Buy back of shares”

Buy back of shares is the purchase by the company of its own shares in the open market, yes that means company makes an offer to the shareholders to sell their shares back to the company. Usually shares are purchased over an extended period of time at a premium to the current market price.

Reason for Buy Back:

Main reasons of the buy back are:

1)     Company is of the view that their shares are undervalued.

2)  Company wants to use it for compensation purposes for example : if the company is thinking to reward their employees with stock options without diluting the interest of existing shareholders.

3)     Company wants to eliminate any threats by shareholders who may be looking for a controlling stake.

Effects of buyback on the share price:

Buyback usually have a positive impact on the shares price because:

1)     Supply of the shares decreases substantially.

2)     This indicates that company is very bullish on its current operations.