SHARES BUY-BACK AS INVESTMENT STRATEGY
Some of the companies whose stocks have failed, try to go in for share buy-back. This has been discussed in an article in the magazine “Capital Market” of Dec 03-16, 07. Generally, when the companies perform well financially, there is a definite jump in their stocks. The companies go in for buy-back, in the absence of good business opportunities. This gives a proportionate increase in the earnings of the remaining shareholders. The various financial ratios of such companies are also thus improved. A company has two options for buy-back i.e. open market purchase, and tender offer or fixed price purchase. The company considers various factors, and arrives at the maximum buy-back price. The share holders should submit their shares to the company, within laid down time in the tender offer system. After the buy-back, the promoter’s holding still goes up. A company can buy-back its shares, up to 10% of its paid up equity capital and reserves. But beyond 10% and up to 25%, shareholders have to approve the proposal. Now the main question is, should an investor give in, or keep quiet. As per one thought, buy-back indicates confidence, and hence we should be patient enough to keep the shares. In case buy-back price is above the current market price, we should give in and later on, buy same number of shares at lower price from the market. But in the mean time, the price may go up and also, capital gain will attract tax. Before taking a final decision, we should study the potential of the growth of the industry of this company, and its market position. If the growth potential is inadequate, it will be wiser to give the shares to the company under this scheme.