Companies have announced Rs 7,800-crore (Rs 78-billion) worth of buybacks in six months.
For shareholders, the big question is: Should one sell holdings in the market to benefit from a buyback?
Buyback announcements often drive stock prices higher if the market price is lower than the price at which the buyback is announced.
There are various circumstances under which managements might announce a share buyback.
If a management feels that its share price is undervalued, or when the company has surplus cash and lower capital expenditure plans, managements may announce a buyback.
The company then extinguishes the shares bought back, reduces outstanding share capital, helping boost its return ratios such as earnings per share.
Says Daljeet Kohli, head of research, India Nivesh Securities: “Buybacks support the stock price if it has fallen too much. If a company has surplus cash and does not need it for capital expenditure, it might utilise the cash to make a buyback.
“This helps boost return on equity.”
As buybacks are open for a limited period, it can get a little tricky to decide whether to sell a stock.
Often stock prices tend to dip after the buyback period is over.
Hence, experts advice it’s better to evaluate the merits of each separately.
For example, companies might announce a buyback despite having huge debt on the books.
Investors should evaluate whether the company ought to be paying off its debt (with its surplus cash)
Lessons for stock market investors
COLUMN: What's behind the spooked stock market?
No need for nervousness, FM assures stock markets
TIPS: How to SELECT stocks to get good returns
World's 20 BEST PERFORMING stock markets