What is share buyback?

A share buyback rules is when companies pay shareholders to buy back their own shares, cancel them and, ultimately, reduce share capital. While fewer shares remain in circulation, shareholders get both a larger stake in the company and a higher return on future dividends.

Here are some of the ways that buybacks work to shareholders' advantage under normal market conditions:

• First, the price of each share tends to increase, because stock in the company retains its original value but comprises fewer shares; still, all that depends on market behaviour. 
  

• Second, the earnings per share (EPS) should increase because fewer shares are in circulation. Shareholders will have a greater stake in the company’s profits.
  

• Unless a shareholder chooses to offload their shares, a buyback is a tax-free transaction.
  

• Share buybacks enable companies to raise shareholder value. Under normal market conditions, the portion of profits a company uses to buy back shares should strengthen its share price.

Imagine a listed company with 1,000 shares, and 100 (10%) of them are held by one shareholder. The company runs a share buyback programme and purchases 100 shares, reducing total share capital by 900 shares. The shareholder, whose stake has just increased by 1.11% to 11.11%, is now entitled to more of the company's profits. Also, the share price should become more attractive to investors.

Share buybacks can be executed through various means, such as open market purchases, tender offers, or accelerated share repurchase programs. However, it's important to note that while share buybacks can benefit shareholders in certain situations, they can also be controversial, particularly if they are perceived as being used to artificially inflate stock prices or enrich company executives at the expense of long-term investment in the business.