Economics
Tech companies, which are sitting on a cash pile, usually prefer buybacks instead of bonus issues as the latter bloat the equity capital.
- A share buyback, also known as share repurchase, is a corporate action to buy back its own outstanding shares from its existing shareholders usually at a premium to the prevailing market price.
- It is seen as an alternative, tax-efficient way to return money to shareholders.
- Shares bought back by the company will be extinguished, leading to a higher earning per share.
- Reducing the number of shares means earnings per share (EPS) can grow more quickly as revenue and cash flow increase.
- It will also boost the share price of the company as the reduction in the capital will lead to a fall in the equity capital.
- Companies tend to repurchase shares when they have cash on hand and the stock market is on an upswing.
Few Disadvantages:
- May lead to drop in price, which means company isn’t healthy
- Market may believe the company doesn’t have growth opportunities
- Can create challenges during economic downturn
News Source: Indian Express
Previous Year Question
Q.1) Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India? (2022)
- An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
- A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
- An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
- A foreign company transfers shares and such shares derive their substantial value from assets located in India
