Share Buyback Advantages and Disadvantages

You might have heard headlines like “TCS announces ₹18,000 crore share buyback” or “Infosys to repurchase shares at a premium.” But what does it actually mean when a company buys back its own shares—and more importantly, how does it impact investors like you?

In this post, we’ll break down the meaning of share buyback, why companies do it, and the key advantages and disadvantages.

What is a Share Buyback?

A share buyback, also called a stock repurchase, is when a company decides to buy its own shares from existing shareholders—usually at a price higher than the current market value.

This reduces the number of shares available in the market, which can influence everything from stock price to shareholder earnings.

🏢 In simple terms:

The company becomes its own buyer—kind of like a business owner buying back a stake they had earlier sold to investors.

✅ Why Do Companies Buy Back Shares?

There are several reasons companies go for a buyback. Here are some common ones:

• To return surplus cash to shareholders
• To boost earnings per share (EPS)
• To show confidence in the company’s performance
• To reward shareholders with a premium price
• To prevent dilution of ownership

🌟 Advantages of Share Buyback

1. Increase in Earnings Per Share (EPS)

When shares are bought back, there are fewer shares outstanding. This boosts EPS, making the company appear more profitable—even if net profit remains the same.

2. Supports Share Price

Buybacks often act as a cushion during weak market sentiment. The increased demand from the company itself may drive the stock price up.

3. Signal of Confidence

When a company buys back shares, it’s often interpreted as a positive signal—that management believes the stock is undervalued or the company is strong financially.

4. Tax-Efficient for Shareholders

In India, buybacks are taxed differently than dividends. For many investors, receiving a premium on their shares through a buyback may be more tax-efficient than dividend income.

5. Better Use of Idle Cash

Instead of parking surplus funds in low-yielding instruments, a buyback helps in utilizing excess cash effectively—especially when growth opportunities are limited.

⚠️ Disadvantages of Share Buyback

1. Short-Term Focus

Some companies use buybacks to artificially boost EPS or stock prices, which may not reflect true long-term performance. It can mislead investors if done without strong fundamentals.

2. Reduces Cash Reserves

While returning money to shareholders sounds good, it also drains cash from the company. This could be risky in an uncertain economic environment or during emergencies.

3. Not Always Value-Adding

If shares are not truly undervalued, the buyback may not offer much benefit. In fact, it might destroy shareholder value if executed at inflated prices.

4. Fewer Shares = Less Liquidity

Reducing the number of shares in circulation can sometimes lead to lower trading volumes, which affects liquidity and ease of buying/selling in the market.

5. May Ignore Long-Term Investment

Companies that prioritize buybacks over investing in innovation, talent, or expansion could hurt their future growth potential.

📊 Buyback Example – Real Life Scenario

Let’s say ABC Ltd. has 10 crore shares outstanding and a net profit of ₹100 crore. Its EPS is ₹10.

Now, if it buys back 1 crore shares, its outstanding shares drop to 9 crore. Even if profit stays the same, EPS increases to ₹11.11—making the stock look more attractive to investors.

But this EPS boost is mathematical, not based on business growth. That’s why context matters.

💬 Should You Participate in a Buyback?

That depends on your goals:

• If you need liquidity and the buyback price is attractive, it’s a good opportunity.
• If you're holding for long-term capital gains and believe in the stock, you may want to stay invested.
• Review tax implications, buyback price vs market price, and the acceptance ratio before deciding.

🎯 Final Thoughts

A share buyback can be a powerful tool—when done for the right reasons. It can reward shareholders, signal strength, and improve financial metrics. But it can also mask weaknesses or be misused for short-term gain.

As an investor, don’t just look at the premium offered. Understand why the company is buying back shares, and whether it aligns with your investment strategy.

In the end, knowledge is your best shield in the stock market.

FAQs

1. What is a share buyback?

A share buyback is when a company repurchases its own shares from the market or existing shareholders. This reduces the total number of outstanding shares.

2. Why do companies buy back shares?

Companies buy back shares to return excess cash to shareholders, improve earnings per share (EPS), support stock prices, or signal confidence in their future growth.

3. Is a buyback good or bad for shareholders?

It can be good if the stock is undervalued and the buyback is well-timed. However, if done just to boost EPS artificially, it may not benefit shareholders in the long run.

4. Are buyback gains taxable in India?

Yes. Gains from participating in a buyback may attract capital gains tax depending on your holding period and tax slab. However, buybacks can still be more tax-efficient than dividends in some cases.

5. How do I know if I should participate in a buyback?

Check the buyback price vs current market price, the acceptance ratio, and your investment goals. If the premium is attractive and you plan to exit anyway, it could be worth considering.

6. Can buybacks impact the company negatively?

Yes. If companies use too much cash or borrow funds for buybacks, it may limit their ability to invest in growth, innovation, or debt reduction.