Advantage Buy-Back

Under the arrangement, shares bought can either be kept as treasury stock, which can be reissued at a latter date, or be extinguished.

Investors will gain as this will result in lower floating stock, which affects the scrip price.

In the event of extinguishing the shares, the equity capital gets reduced, which pushes up the earning per share as well as return on net worth.

However, for companies without a good cash flow, extinguishing its shares would not be a fair idea.

Although buy-back of shares appears good for shareholders, there are certain factors which need to be considered.

First, at what price should the companies be allowed to complete the deal?

The Securities and Exchange Board of India formula, used at present for pricing preferential allotments, seems to be the logical answer.

Another question is that of payment. When would an investor get his payment after opting for a buy-back? This could be a grey area considering recent cases where few companies have taken a long time for payments in the case of open public offers.

An ideal period would be a typical settlement cycle on the stock exchange.

Resorting to an escrow account mechanism could be another solution.

Any company offering a buy-back to its shareholders should be required to transfer the requisite funds to the escrow account. This would definitely reduce delayed payments and ensure commitment on the part of the company.

Another problem can occur when the shares sent for buy-back exceed the total shares put up for a buy back necessitating a pro rata approach.