Last updated on November 27, 2023
Share buybacks have become popular and gained prominence over the years as they enable companies to deliver additional shareholder value, consolidate ownership, preserve stock prices, and boost financial ratios. Single share buyback strategy is something that can generate decent returns on a small capital for retail investors. Before we dive deep about the workings of one share buyback strategy, let’s revisit the basics.
Companies usually undertake buybacks to support their stock price and return excess cash to shareholders and thus, the buyback price is generally higher than the prevailing market price. Regulations by SEBI mandate that anyone who holds shares worth less than INR 2 lakh as on record date is classified as a small shareholder and 15% of the shares in the buyback are reserved for such investors. The threshold for small shareholders in buybacks is similar to their definition for IPOs.
While the 15% reservation is certainly beneficial for retail investors, there is still an element of risk as companies don’t necessarily purchase 100% of an investor’s shares. Let’s understand this with an example. Let’s say an investor has purchased 10 shares at INR 1,000 apiece in order to participate in the buyback which is conducted at INR 1,400 per share. Since there are more shares being tendered than what the company intends to repurchase, it ends up buying only a fraction of shares tendered. In our example, it can be that the company accepts only 3 shares from the investor and returns 7 shares.
If the stock price remains at INR 1,000 per share in the open market, the investor still makes a profit of INR 1,200 by selling 3 shares to the company at INR 1,400 and the remaining 7 shares in the market at INR 1,000 per share. However, the situation changes if the stock price drops in the open market and the profits of the buyback may be nullified by the losses in the remaining shares. This is where one share buyback strategy helps.
Single share buyback strategy
Under this strategy, the investor needs to buy just one share of the company. If the IPO is big enough, the company ends up buying 100% of the tendered 1 share as it can’t complete the transaction in a fractional way.
In the case mentioned above, the investor can make INR 400 or 40% returns in 1 month on a capital of INR 1,000 by selling the share to the company at INR 1,400. As a real-world example, investors in TCS buyback made up to INR 800 by purchasing one share at INR 3,700 and tendering the same to the company at INR 4,500 per share. That amounts to a return of 21.6% in roughly a month. For simplicity, we have excluded brokerage and other charges.
Single share buyback strategy is scalable and can be replicated in multiple demat accounts of friends and family members. It is important to highlight that the PAN used in these demat accounts need to be different.
Advantages of one share buyback strategy
- Confirmed profits in eligible buybacks
- High return on investment
- Quick recovery of initial capital
- Can be replicated in multiple demat accounts
Disadvantages of single share buyback strategy
- Small profit in absolute terms
- Single share buyback strategy works only in buybacks at high prices
- Not scalable for many individuals without willing partners
- Not practical for investors with high capital as scalability becomes a challenge
Overall, buybacks are an efficient way of returning capital in an almost tax-free way. Investors have also stepped up their understanding of this tool and pocketed gains as a result. Within the realm of buybacks, single share buyback strategy works and offers decent returns in small accounts. Unfortunately, it doesn’t work for investors to make decent return in absolute numbers due to the issues highlighted above.
