Buy Back of Shares are special situation arbitrage opportunities that companies offer to investors. The offer/exit price in such offers is usually at a substantial premium to the prevailing market price. This price differential offers arbitrage opportunity. These corporate actions are of special interest to investors as it offers quick and attractive returns. The stocks of those companies usually gain momentum after such announcements.

Arbitrage involves buying and selling the shares across two different markets to profit from the price difference. In recent months, many companies like Infosys, NMDC, HEG, Coal India and many others have announced buyback plans.

Buy Back of Shares Can Provide Arbitrage Opportunity.

Let me explain how arbitrage opportunities work and can be used to profit from with an example of the recent Infosys open offer – On Jan 11, 2019. Infosys announced buyback offer and fixed January 25 as record date for determining the eligible shareholders.

Particulars Units Calculation
Total equity shares Cr. shares 436.86
Infosys will buy-back Cr. shares 10.33
Buy back Price Rs./share 800.00
Max. buy-back amount Rs. Cr. 8260
Buy-back to total equity % 2.36%

Infosys’s stock price was Rs. 730 at the time of announcement. Effectively the buyback offered around 10% arbitrage opportunity.

Note – As per SEBI guidelines, it is mandatory to reserve 15% of buy back of shares offer for retail investors with holdings up to Rs 2 lakh in the company (retail portion).

Investors looking for short term opportunity can buy shares of Infosys (up to the value of Rs 2 lakh – as on the record date) in the open market and offer them in the tender offer. An investor could have bought a maximum of 250 shares of Infosys before the record date (200000/800).

Note: Buyback price is valid only for tender offer route and not in the case of open market purchase. In the above example –  Infosys buyback was through open market purchase route and hence the shares could not have been tendered. That said, all else remaining same, at the time of buyback the price does move higher when stocks are purchased from open market.

SEBI guidelines (Reserved) 15% (mn shares) 1.55 (15%*10.33)
Individual share capital upto Rs. 2 Lacs (as of Dec 2018) Cr. shares 2.88
Acceptance Ratio (if all tenders in retail category) % 54%
Acceptance Ratio 25% 54% 75% 100%
Amount Invested in Buyback 182,500 182,500 182,500 182,500
No. of Shares that you can tender in the buyback 63 135 188 250
Investment @ Rs. 730 45,625 98,550 136,875 182,500
Sell @ Rs. 800 50,000 108,000 150,000 200,000
Buy back Profit 4,375 9,450 13,125 17,500
Profit 2% 5% 7% 10%

Keep in mind that the key risk in this whole exercise is the acceptance ratio itself.
 If a large number of new investors buy at the time of buyback announcement (till the record date) with the objective of tendering the shares in buyback, then the acceptance ratio will drop. In addition, if the share price rises by the time of record date, it could result in lower return.

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