Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

How Some Investors Make Buybacks More Lucrative

Buybacks help consolidate ownership, reward shareholders and boost earnings per share. Savvy retail investors employ a buy-sell-buy strategy to make share repurchases even more lucrative.

In 2018, 55 companies bought back shares. According to BloombergQuint’s analysis, 23 of these with a market capitalisation of at least Rs 500 crore each returned pre-tax gains of 1.5 percent to 14 percent from the record date till the end of buyback period.

But some retail investors managed to earn higher pre-tax returns by not holding the shares throughout the buyback period. What they did instead is bought shares just prior to the record date—the cut off to become eligible—sold them at the highest intra-day price after the record date and repurchased at a lower price before the offer closed to tender the shares.

This is a strategy that many retail clients employ to increase returns, said Parthiv Shah, director, TRACOM Stock Brokers Pvt Ltd. “It works better than when we just buy and hold the stock for the entire buyback period,” he said. “Buyback prices are generally higher than the prevailing market prices and with this strategy investors get a chance to better their returns as they would be able to repurchase shares at lower prices near the buyback closing date.”

In a buyback, investors holding shares of less than Rs 2 lakh are fall in the retail category. Usually, they buy shares two days prior to the record date. These remain in the account to be tendered on the closing date. That blocks capital for the entire buyback period.

Instead, some investors try this:

  • Buy shares two days prior to the record date.
  • Sell shares the day after the record date at the highest intra-day price.
  • Buy back shares two days prior to the closing date so that these can be tendered in the offer.

Based on the acceptance ratio—the proportion of shares accepted— disclosed by companies after the buyback, such a strategy would have returned higher gains in 17 out of the 23 companies, according to BloombergQuint's calculations.

Brokerages have specialised teams for such trading for clients, said a senior executive at an investment advisory firm that itself employs such strategies to improve returns. The person didn’t want to be identified as he’s not authorised to speak about investment decisions.

But it’s not foolproof. The returns would fall if the stock price were to rise significantly after an investor sells shares.

Investors need to watch out as there is a risk of prices moving higher towards the buyback closing date, Gurmeet Chadha, chief executive officer and co-founder, Complete Circle Consultants Pvt Ltd., said. That could lower returns as they will have to repurchase shares at a higher price, he said.