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UPSC Preparation: Comprehensive Share Buyback Insights.



  Oct 14, 2023

Share Buyback:Basics for UPSC



Q1: What is a share buyback?

A share buyback, also known as a stock repurchase, is a financial strategy employed by companies to purchase their own outstanding shares from shareholders from the stock market.

Q2: Why do companies engage in share buybacks?

Companies undertake share buybacks for various reasons, including:

Undervaluation of their stock.

Having excess cash reserves.

Improving earnings per share (EPS) as number of shares reduces and so share prices go up.

Tax-efficiency compared to dividends.

Q3: How does the tax treatment differ between dividends and buybacks?

Dividends are taxed at shareholders' applicable slab rates, potentially resulting in higher taxes. In contrast, buyback gains are typically taxed at a lower rate at the company level, and shareholders may be exempt from tax under certain provisions.

Q4: Which companies have recently announced buybacks in 2023?

In 2023, over 40 companies have announced share buybacks, with notable ones including TCS (Rs.17,000 crore), L&T (Rs.10,000 crore), and Wipro (Rs.12,000 crore).

Q5: What are the benefits of participating in a share buyback?

Share buybacks can lead to a rise in a company's stock price due to reduced supply of shares in the market. They can also boost EPS and return ratios and thus make the balance sheet of the company look good.

Q6: How can shareholders decide whether to participate in a buyback?

Shareholders should assess the company's growth prospects and current valuations when deciding to participate in a buyback, considering their investment goals and the prevailing tax regulations.

Q7: Are share buybacks tax-effective for both companies and shareholders?

Yes, buybacks are often more tax-effective compared to dividends, as they can result in lower tax rates for both companies and shareholders.

Q8: What are some examples of late and upcoming buybacks in 2023?

TCS, Piramal Enterprises, Hinduja Global Solutions, Indiamart Intermesh, and Triveni Engineering are among the companies that have initiated buybacks in 2023.

Q9: How do buybacks impact a company's stock price?

Buybacks can cause a company's stock price to rise because they reduce the number of shares available in the market, affecting supply-demand dynamics.

Q10: What are the potential benefits for shareholders in a share buyback?

Shareholders can benefit from higher stock prices, improved EPS, and enhanced ownership proportions as a result of share buybacks.
 
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