Buy Back Shares

Wipro Buy Back, should you sell your shares?

Wipro in the board meeting held on 13th Oct 2020 has announced a Buy-Back of its shares at a price of Rs.400/- per piece. Should you sell your shares back to the company? You can decide to tender the shares or not to tender the share after reading this article.

We all know what the company Wipro is into and hence we will not be discussing those details. Wipro has rewarded the shareholders in the past and is trying to do so again this time. Buy-Back of shares has become a common thing nowadays; we will discuss the reasons also.

What is a Buy Back?

In simple words, we can call buyback of shares as a reverse IPO. What happens during an IPO? Assume a company requires capital or goes public; it sells the shares to those willing to invest and uses the money for the growth of the company. This is the basic purpose of an IPO.

Once the company grows, and there are enough reserves and surplus, the same company can announce a Buy-Back of its shares, meaning this time the company buys the shares the investors hold and pays them the market value or what the board decides. Hence, it’s the reverse process of the IPO.

Why do companies Buy Back their shares?

  1. A company may want to reduce the number of the free float of shares in the market and reduce the number of shareholders too. This gives them more flexibility in decision making as the size of the company goes up.
  2. Companies buy back there shares to reduce the capital when the number of shares reduces in the market the demand increases compared to the supply. This arrests the possible fall in the share price.
  3. On a lower capital, all the financial ratios look better and hence more possible investors look at the stock compared to the peers.

Why companies off late are buying back shares in India?

Tendering your shares in buyback is like selling your shares in the market. It attracts the same capital gains treatment, which you get when you sell your shares in the market.

The dividend distribution tax is currently applicable in India. Hence promoters of companies are announcing buybacks and encashing out instead of announcing dividends. The promoters and the shareholders save tax this way.

Should you tender your shares in Wipro’s buyback?

The record date may get announced soon. The CMP of the Wipro shares is at around Rs.341/- as on 15-Oct-2020. The buyback has been announced at a rate of Rs.400/- per share, that’s a premium of 17.30% to the current price. Looks interesting to those holding the shares already. Should you arbitrage right now? Ask that to your adviser.

Those not holding the shares can have a look at the table below. Assuming you buy shares today at 341 to tender them in the buyback, you may make 5.71% returns if at least 33% of your shares are accepted.

Can it happen that no shares of yours are accepted? Theoretically, it’s yes. But we feel that some portion may be accepted from everyone tendering the shares. That’s the normal practice by all big companies.

We find good support for the share at around Rs.320 and then around 302. Meaning, In case of any market panic, buying interests may be seen at those levels.

The calculations in the above table are assuming that a person buys at CMP 341 and tenders at 400. Keep in mind that the share price is not going to stay at 341. It will surely move up or down. You may buy at 341, and the stock can go up possibly more than 5.71%, and you will make more money than tendering the shares. You may buy at 341, and the stock can fall, giving you more loss than the possible profit. You may not even buy, and the stock may fall, giving you better profit. The stock movement is not factored in the calculations.

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