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Share Buyback

  • IASbaba
  • October 17, 2022
  • 0
Economics
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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)

  1. An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
  2. A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
  3. An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
  4. A foreign company transfers shares and such shares derive their substantial value from assets located in India

 

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