A buyback is a transaction in which a company buys back its own shares. It is capitalization of its own surplus cash. hence it can also be viewed as an alternative to cash dividends. Shares that have been issued and subsequently buyback are classified as treasury shares. They are not then considered for dividends, voting rights or computing earnings per share(EPS). Some of the basic reasons for share buyback or repurchase are:
1. Management perceived shares in the company to be undervalued in the market place or more generally to support the share price. Company intrinsic value is more than market price.
2. There is no better opportunity to deploy cash, which can generate better returns than cost of capital.
3. Tax efficiency in distributing cash, in market in which the tax rate on cash dividends exceeds the tax rate on capital gains.
4. To absorb increase in share outstanding resulting from the exercise of employee stock options.
5. Capitalization of reserve and surplus to improve ROE.
Various share buyback method used by the companies are:
1. Buy in the open market