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Demystifying Share Buybacks



  Sep 01, 2023

Understanding Share Buybacks


1. What's a Buyback?

A buyback is when a company re-buys its own shares. It's like a reverse of issuing stock.
 

2. Why Do Companies Do Buybacks?

Companies might have too much spare cash, or they might want to boost their stock prices. It's also a way to show shareholders they care and that the company is doing well financially.
 

3. How Do Buybacks Boost Stock Prices?

Think of it as supply and demand. If there are fewer shares around, each share becomes more valuable.The bought-back shares are extinguished, that is, cancelled. They are not on record any more.
 

4. Are There Tax Benefits?

Yes! If shareholders don’t sell their shares during a buyback, they can avoid some taxes. When they sell the shares later, they might pay less in taxes.
 

5. What About Excess Cash?

When a company does a buyback, it's like saying, "Look, we have lots of extra money!" This can make shareholders happy.
 

6. Are Buybacks Always Good?

Not always. Sometimes, companies might boost their stock prices in the short run, which might not be great for long-term growth.
 

7. Can Shareholders Say No to a Buyback?

Yes, they can. It's their choice.
 

8. How Do Buybacks Redistribute Wealth?

Companies have different ways to give back to shareholders. Buybacks are one way. Other ways are dividends or reinvesting in the business.
 

9. Why Do Some People Dislike Buybacks?

Some feel buybacks only help the big shareholders and company heads. They believe companies should use their money in ways that help everyone, like investing in the business.
 

10. What Happened with Paytm?

Even though they weren't making a profit, Paytm's parent company said they would do a buyback. Some people didn't like this and raised questions.
 

11. Should Big Companies in India Be Watched More Closely When Doing Buybacks?

Some people think so. They feel there should be more checks and balances.
 

 12. Are There Rules About Buybacks in India?

Yes, there are. The Securities and Exchange Board of India (SEBI) has rules about this.
 
In short, buybacks are one tool companies use, but like all tools, they need to be used wisely and transparently.


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