(16) Increasing Promoter’s Holdings Without Additional Investment
It is one of the most legitimate reasons for companies going for shares repurchase decision. Company promoters are individuals or organizations that play an indispensable role in the formation of a company.
They are mainly involved in raising money for a company to run its business operations as well as to meet various financial obligations. It is usually done by offering different investment vehicles such as stocks, bonds, debentures & many more.
In this process, their existing stake is likely to decrease depending on the proportion of new shares to be issued. But, if the growth prospects of a company appear to be brighter then promoters don’t want to decrease their stake at any cost.
Shares repurchase plan comes out to be a great way to increase promoter’s holdings without additional investment of their own. It is because when other shareholders tender their shares in the buyback process then promoters prefer to stay away from it.
In absence of their participation, their existing stake in the company increases automatically. Sometimes, stock buybacks are also carried out ahead of equity dilution or maturity of stock options.
At this stage, promoter’s stake is also increased or diluted to a lesser amount if they don’t participate in the process. Thus, shares repurchase provides an easy means to raise promoter’s stake simply by utilizing company’s funds to buy shares from open market.
(17) Altering Capital Structure To A Desirable Level
It is one of the most wonderful reasons for companies going for shares repurchase decision. Capital structure is the way in which a corporate organization finances its growth & operations.
It is usually done through a combination of debt & equity. Shares buyback has the tendency to decrease the outstanding equity of the underlying company.
When implemented, it increases the debt-equity ratio which in turn is a popular measure of the capital structure of the firm. This alteration in capital structure has the advantage of increasing a company’s Return on Equity (ROE).
It is simply because company’s returns are now linked to a lower level of equity. Additionally, a higher ROE is usually viewed as a positive feature in the business world.
Thus, shares buyback decision helps to shift capital structure of a company in favor of debt.
- Reasons Behind Company’s Buyback Offer: Shutterstock