How to make money with share Buyback arbitrage in the India stock market!

The main aim of value investing is, you want to buy an asset which you know for a fact is much more valuable than the price you are paying for it. Buyback arbitrage opportunities are perfect because you have a certainty that you will be able to sell the shares back to the company at a fixed price in the future.

In this article, I will explain Buyback arbitrage opportunities which appear in the Indian stock market time and again because it will help you improve your stock market returns. As always I have tried to make this article as simple as possible for first-time investors.

What is a Buyback?

Companies often seek to buy back their own shares from the market. Most often they are trying to buy back their shares in an effort to shrink the number of shares outstanding, which decreases the equity in the business and, in theory, should cause an increase in the per-share earnings of the business.

Fewer shares outstanding means that the remaining shares get a bigger cut of the pie.

In India, when companies decide to buy back their own shares, they will often make a tender offer directly to the shareholders.

The fixed price offers

Indian companies generally offer to buy x number of securities at a fixed price for a set duration of time. The shareholders tender their securities and the company will keep buying until the amount they have set aside for the buyback offer is exhausted.

In the event that too many shares are tendered, the company will often prorate the number they buy from each of the shareholders.

For example, You have tendered 100 shares, but the shareholders’ total tendered 110% of the number of shares the company offered to buy. The company will then discount everyone’s tender by 10%, which means that the company will only buy 90 shares from you. The other 10 shares will be returned to you.

Arbitraging such a situation is easy, the deal is absolutely certain to go through. The only risk is that the company will have too many shares tendered and we will be stuck with only prorate share sold. This means that you will have to go into the market and sell the rest, which puts you at risk for downward market movement between the close of buyback tender and the time it takes to get rid of the position.

However as I explained before with shares buyback, it means that the leftover shares are probably worth more, because there are fewer shares outstanding as a result of the buyback.

The SEBI rule of 15% for retail investors

The above buyback example is applicable worldwide. However, in the Indian stock market, there is a unique rule which you can use to increase your returns. The India stock markets are regulated by SEBI (Securities and exchange board of India).

SEBI has made it mandatory to reserve 15 percent of the offer for retail investors with holdings up to Rs 2 lakh in the company.

Let us now understand What you need and how you use this rule to make money in Indian stock market

Arbitrage analysis

Before we begin with our real-life example of how buyback arbitrage works. You must remember that you need 5 pieces of information to take action namely :

  1.  Size of the Buyback
  2. Record date
  3. Shareholding below 2 lakh INR
  4. Price of the Buyback.
  5. Market price on day of announcement

In September 2017 Wipro announced here are the details

  1. Size of Buyback = 11,000 crores
  2. Record date = 15th September 2017
  3. Price of BuyBack – 320 Inr
  4. Shareholding below 2 lakhs = 10.19 crores
  5. Market price on day of announcement = 290

Let’s begin,

The first thing to consider is the size of the buyback which is 11,000 crores. Now if we apply the SEBI rule to this then 15% of 11,000 crores = 1650 cr Rs are reserved for retail shareholders. This would mean that the company will shares worth 1650 crores at 320 Inr from retail shareholders  = 1650 crores/320 =5.15 crore shares.

The next thing to consider is there are 10.19 crores retail shares. This would mean that the company will tender at least 50% of your shares if you buy at 290 before the record date.

This will be a 10% return on investment which is completely risk-free. The balance shares can be sold off in the free market after the buyback is over.

Note: Make sure your holding is below 2 lakhs so you get benefit of SEBI Rule

Video Explanation




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