Share repurchases are treated as a method of distribution through which organization get back the shares which was sold to shareholders. This method could be a substitute of cash dividend policies as the shares are bought from the shareholders by cash transaction. The repurchasing procedures and shares are considered as treasury stock or it gets dismissed (Takeuchi, 2010). Those repurchased shares will not be accounted for dividend pay outs. In case of share repurchasing, the outstanding ones normally get decreased and adjusted with the repurchased ones. Let us discuss the reasons of share repurchasing:
If the previously issued shares are considered as a lower valued product by the organization or if the organization thinks that the asking share value is reasonable, then they use to repurchase the shares from the shareholders.
Most of times, the cash distribution method to the shareholders is consisted of repurchasing procedures due to its easily adaptable nature (Walter, 1967).
The taxes of company’s pay out towards shareholders are higher than the taxes on capital. The repurchase procedure is known to ensure the benefits on such taxation procedures.
The stocks which are not owned yet by the shareholders should be decreased in number. In this regards, those share could have a high value due to reduction of outstanding ones (Chakraborty, 2008).
Share repurchasing reduces the control by the shareholders on the organization that has bagged a maximum percentage of shares.
Methods of share repurchase:
Open market deal:
The shares should be bought from the shareholders in an open marketplace. The entire repurchasing procedure will be done with the current market valuation. The decision of repurchasing should be authorized by the board members of an organization whereas the purchasable share percentage and purchase time will also be planned by the board members as per the market scenario (Bierman, 2001). This method is known as the cost effective one in comparison with dividend method of cash distribution.
In this method of repurchasing, the purchasable share volume gets fixed by the organization. In case of pricing, the shareholders are given with a price bracket which includes a lowest and a highest price as per market variance (Berk and DeMarzo, 2007). Actually, the shareholders bid to maximize their selling price on the given pricing bracket by the organization. Organizations are aimed to buy the fixed volume of shares and for that they use to provide a share price to the shareholders where their asking share volume will get qualified.