Although buybacks come with a lot of benefits, typically it is the big shareholders who benefit the most from it.
IMO, to put it plainly, buybacks are mostly designed to eliminate some of the small shareholders (at a bargain) and increase the voting rights of the continuing shareholders.
To put it alternatively, it is just using the company’s cash reserves to increase the shareholding of the promoters (intended target), while also benefiting the other continuing shareholders (by-product).
Warren Buffett, who is an advocate of share buybacks instead of dividends, said
“Anytime you can buy stock for less than it’s worth, it’s advantageous to the continuing shareholders”
Buybacks typically take place when the management of the company is of the view that it’s shares are undervalued/beaten down, and this is the best time to do bargain purchase.
Ultimately, it creates value not for the shareholders who sell them, but for the ones who continue to hold on.
Although it is not mandatory and it is a voluntary choice to participate in buybacks, it is mostly the small retail shareholders who might participate in them.
And the benefits post-buyback for the continuing shareholders are obvious.
Their % shareholding in the company increases after such buybacks, and they get to enjoy a bigger piece of the pie without actually buying any additional shares or spending any extra rupee. They get higher EPS due to reduction in outstanding shares and a bigger share in the future dividend payouts etc etc, you get the point.
If u ask me, dividends seem to be the more equitable way for shareholders’ wealth maximization, and taxing buybacks like dividends, typically disincentivizes the big shareholders to take advantage of buybacks for personal gains.
P.S.
In USA, rich guys like Warren Buffett prefer buybacks typically because they come with a crazy tax-advantage called stepped-up basis.
The tax disparity between dividends and buybacks arises when shareholders do not sell back their stock during the buyback. When the number of outstanding shares is reduced, the remaining shareholders benefit from increased value per share. This rise in value increases the capital gains on those assets, but shareholders do not owe taxes on those gains until they sell their shares and the gains are considered “realized.” This presents two distinct tax advantages for U.S. shareholders.
First, shareholders may hold onto their shares, deferring the income tax for years or decades. This is not merely a matter of timing but rather allows shareholders to generate even more income over time. As their shares appreciate, their wealth and purchasing power rises. Even worse, shareholders may take loans against their assets, allowing them to effectively spend their income without technically “realizing” it and paying income taxes on it.
Second, if shareholders do not ever sell their assets, the capital gains will escape taxation completely. Unrealized gains on assets passed to heirs disappear from the tax system under current rules. The heirs benefit from the stepped-up basis rule, which resets the capital gains on assets to zero at the time of inheritance. Heirs then owe capital gains taxes only on the gains that accrued after they took ownership of the shares.
Higher Stock Buyback Tax Would Raise Billions by Tightening Loophole for the Wealthy – ITEP.