Due Diligence . How to tender shares in a buyback

Despite the havoc wrecked by the Covid-19 pandemic, 2020 has seen over 40 companies announcing share buybacks.

Including the recently announced share repurchase plans of IT majors TCS and Wipro, buybacks amounting to over ₹32,000 crore have been announced in 2020.

Companies that have excess idle cash may consider distributing it to shareholders in the form of dividends or by repurchasing a certain amount of the outstanding shares through buyback offers.

The shares that are bought back are then extinguished by the company. Reducing the number of shares outstanding helps improve the earnings per share for continuing shareholders and perks up the return on equity.

Since the buyback price is usually set at a premium to the prevailing market price, a buyback announcement sends out a positive signal for the stock. Ideally, it denotes undervaluation of the stock and the management’s confidence in the company’s prospects.

Your decision to participate in a buyback can be based on variables such as the buyback price and the prospects for the company. If you have decided to accept a buyback offer, here’s what you should know.

Procedure

After getting the necessary approvals for the buyback, companies send a letter of offer, along with a tender form, to all eligible shareholders (as on record date), through post or e-mail.

The opening date of the buyback offer is mandated to be within five days of dispatch of offer letter to shareholders.

For those having a demat account with an online broker, the procedure is simple. Most online brokers such as Zerodha and HDFC securities have separate tabs for share buybacks (Corporate Action in Zerodha and Buy Back in HDFC securities). After logging in to your account, you can select the particular tab and enter details of the buyback trade.

For those of you applying using the physical tender form, the sharebroker will, in turn, place the bids for shares on the designated exchange(s), on your behalf. While the shareholder is just required to specify the number of shares he/she wishes to tender in the case of a tender offer, the agreeable offer price must also be mentioned in case the buyback is being done through open offer.

This is because in the case of a tender offer, the offer price is fixed, while in the case of an open offer type of buyback, the company specifies a maximum price and buys back shares from the market during a defined time period.

Consequently, a uniform price might not be paid to all shareholders in the case of a buyback through open offer.

Shares held physically

Shareholders who continue to hold the shares in physical form must get their shares dematerialised before the close of the buyback period, in order to tender shares in the open offer buyback.

In the case of a tender offer buyback, eligible shareholders who hold physical shares and intend to participate in the buyback should submit certain documents such as PAN and address proof to their sharebroker, along with the tender form, original share certificates and valid share transfer forms.

Upon verifying these documents, the sharebroker will place the bids for buyback and give the shareholder a Transaction Registration Slip (TRS). Shareholders are then required to submit the original shares certificates and other documents mentioned above, along with the TRS generated to the registrar of the buyback, within two days from the offer closing date.

Acceptance and rejection

No matter how attractive the offer price may seem, it is the acceptance ratio that matters to shareholders tendering their shares in a buyback.

Acceptance ratio is the ratio of shares accepted to the total number of shares tendered by investors.

For instance, consider the buyback offer of Just Dial (August 4, 2020), where the company announced a buyback of up to 31.42 lakh shares (representing about 4.84 per cent of the then outstanding shares of the company). However, based on the company’s post buyback announcement dated August 31, we infer that eligible shareholders bid for over 385 lakh shares. Hence, the acceptance ratio was at about only 8 per cent.

SEBI has mandated that at least 15 per cent of the number of shares must be reserved for retail investors who hold shares worth up to ₹2 lakh (market value), as on record date. This could improve the acceptance ratio. In the Just Dial buyback, the company received bids for over 17 lakh shares from small shareholders, for whom 4.71 lakh shares had been reserved.

Consequently, the acceptance ratio for small shareholders was much higher at 27 per cent.

Also, the acceptance could be better when not may shareholders tender or many only partly tender their shares.

Upon finalisation of the basis of acceptance, the company will transfer funds to the respective shareholder’s bank account through their sharebroker. If the buyback offer is rejected, the shares shall be credited back to the demat account of the shareholder, or the physical shares be sent back to the shareholder. Shareholders should note that the funds received shall be net of any cost, applicable taxes and charges (including brokerage) that may be levied by their sharebroker.

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