A share buyback/ share repurchase is when a company buys back its own shares from the market and absorbs the shares hence reducing the number of shares outstanding in the market. It is often an indicator that a company’s management thinks its shares are undervalued.

Share buybacks cause an increase in the earnings per share and often elevates the market value of the remaining shares. It also causes the share price to increase as there are fewer shares available in the market hence result in increased demand which may push up the share price.

Stock buybacks are carried out by a company in two ways:

1. Tender offer

A company presents a tender offer to its shareholders whereby they have the option to submit or tender a portion or all of their shares within a certain time frame and at a premium to the current market price.

When the shareholder takes up the offer, they will state the number of shares they want to tender and the price they are willing to accept. Once the company has received all offers, it will find the right mix to buy the shares at the lowest cost.

2. Open market

A company can buy shares on the open market at the market price over an extended period of time.

Reasons for Prohibition of Share buybacks

1. The risk of abuse of power by company directors who can increase their voting power when the company buys back its shares.
2. To protects against manipulation of share price by companies that may use the share buybacks to boost their share price.