Explained: 8 reasons why companies share back purchase and what it means for investors

Infosys’ Board Meeting on Thursday to consider that a stock purchase proposal has steeped in the stock of fresh life, which has collected 7% in the last two sessions. As De Buzz builds, ET -Markten explains why companies share purchasing and what it means for investors:

Companies buy back their shares through open markets or through the procurement route for various reasons. Here are eight common:

Improve the shareholder value

By reducing the number of outstanding shares, the profit per share (EPS) increases. This often increases the share price and indicates trust in the market.

Return surplus cash to shareholders

Companies sometimes distribute surplus cash through return. This method is tax efficiently and benefits only participating shareholders, in contrast to dividends, who are distributed to everyone. It is especially popular in markets with high distribution tax.

Signal of undervaluation

Management can initiate a repurchase if it believes that the shares are undervalued. It indicates trust in the growth and basic principles of the company.

Stabilize the stock price

Back purchase offers support in volatile or weak markets, which stimulates the sentiment of investors.

Offset dilution of esop’s

Companies that issue a large number of stock options for employees (ESOPs) often use back purchase to prevent excessive dilution of the interests of existing shareholders.

Defend against hostile acquisitions

By reducing the free float, back purchase make it more difficult for an acquirer to collect a controlling interest.

Flexibility versus dividends

In contrast to dividends, Bedoop are one -off events, which means that companies have flexibility to manage cash without committing themselves to recurring payouts.

Legal or tax arbitration

In some cases, the tax treatment returns more attractive than dividends. Since 2019, the tax on Back purchase has shifted to the company instead of shareholders since 2019, making it favorable for investors.

(Disclaimer: recommendations, suggestions, views and opinions of the experts are their own. These do not represent the views of economic times)