Query of how buyback works?

Stocks
1

Lets see A company owned by A B C three persons,
A has 20 %
B has 30 %
C has 50 %

They launch IPO reduce promoters stake to 70 %
Now A has 15 %
B has 20 %
C has 35 %

suppose after 20 years company offers buyback of public share
will this buyback go to this promoter ?

i read that quick heall promoters are also participating in buyback (means they are selling their portion in buy back )

who takes this buy back then, if not promoters ?

2

Goes to company. @mohitmehra can you give more details, please.

3

Aslan, buyback is done by company and not promoters. And in this case all the shareholders (including promoters) are eligible to participate in it.
Company will use cash available on its book to buyback and then extinguish these shares.
If everybody participates in buyback, overall shareholding % will remain more or less same for everyone even after buyback (but count of share will reduce proportionately). So basically it is tax efficient method for company to pass cash back to shareholders.

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4

i got the little bit idea from your answer,

i didn’t get extinguish part

I got the tax part

5

Let me explain in simple terms using your example but with numbers. So IPO is done following is holding now:
A-20 shares
B-20
C-30
Public-30
Total shares 100 (100%)

Now company is making profit and has accumulated 1 cr rupees on its book and wants to give back this money to shareholders. So they decide on buyback of 50 Shares on proportionate basis for 1 Cr.

So everyone is eligible to give back 50% of their holding to company at agreed price (this is generally higher than market price).
And everyone does that. So now holding will be:
A-10
B-10
C-15
Public-15 total -50 shares (100%)
So overall % holding remains same but share count drops proportionately.
Company got 50 shares back, which it will extinguish, or simply delete it. They no longer exist.

So basically a simple way to pass money from company to shareholder.

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6

Here is how buyback calculation works

Say X company has 1 Crore outstanding shares out of which 75% is promoter holding, and 25% is public holding. These 25% public holding shares are called floating shares. When companies offer buyback, they offer it on floating shares. For Ex. X company announced that 10% of shares would be brought back, then it means. The company will purchase 25 lac *10%= 2.5lac shares. Now when the company successfully buys back shares, then the % of holding gets changed.

Here is how

Total outstanding shares now is 75lac(Promoter) + 22,50,000 (Public)= 97,50,000

Now promoter still holds 75lac shares out of 97,50,000 shares, increasing the holding percentage to = 76.92% (75/97.5). Earlier it was 75%. This change in promoter holding % is due to buyback.

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7

this way company extinguished the shares from the market,
now similar way if the company wants to create new shares without selling promoter stake how will they do this.

8

Multiple ways to create new shares for company

  1. Issue bonus shares - everyone gets extra share including promoters. overall holding % remains same for everyone (this is not really selling. Just creating new shares out of reserves)
  2. Issue rights shares - everyone is eligible to buy new shares depending on their holding. Shareholder / promoter may or may not participate in it. Recently reliance did it in big way. Lot of other companies doing it. Generally promoter tend to participate in this. but they may choose not to.
  3. Follow on public offer - Sell share on market. Either promoter can sell their share or company can issue new shares. Very popular with PSU for divestment
  4. Qualified Institutional Placement (QIP) - Company can sell new shares specifically to institutions like MF, FII etc.

There can be few more ways in which company can create new shares and sell. But these should be the most popular ways to do it.

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9

Very well written Akash, just to add my two bit.
There are I believe two types of buyback
open market buy back - In this case the company will buy back the shares from the open market just like you and me. Example : Infosys has announced open market buy back.
Tender offer buy back - In this case all existing shareholders can tender their shares at a predetermined rate. Example - TCS - they offered to buy back at 3,100 per share.