Paytm has been facing a huge decline in the value of its shares in the stock market and has suffered losses in recent times. Despite their financial conditions, the decision to buy back their stocks has shook the investors as well as confused them. Buyback strategy is being adopted by several companies like Infosys , TCS , and Wipro. But the Buybacks did by aforementioned companies and Paytm are not the same.
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What is Buyback?
Buyback is the market strategy adopted to boost the confidence among the company’s investors by increasing the share value of the company and also by ensuring their high returns while selling their stocks.
A company does a Buyback by following ways:
- The company with its huge bank balance powered by their profits announces to buy its stock with a high premium(40-50%).
- This would signify that the company is making a huge profit thus it has decided to Buyback.
- As the company buys its stocks with high premiums it could generate enormous returns to its investors compared to their dividends.
- It boosts the confidence among its investors hence maintains the financial stability in the market.
Improving the Financial Indicators:
Buybacks improve the financial indicators like P/E ratio and EPS ratio. EPS is the ratio between profit and total shares with the public, since Buyback reduces the number of shares with the public the EPS will also increase so increases the dividends of existing shareholders. P/E is the ratio between price and EPS, since EPS increases P/E ratio decreases. The decrease in P/E ratio signifies that the company’s shares are more attractive in market. So Buybacks would improve these financial indicators of the company thus ensures the increase in stock value of the company.
Tax Efficient Way:
Buybacks would create a tax efficient way to distribute returns to the investors. When an investor receives the dividend from the company he needs to pay a certain percentage of the dividend based on their income. So the total return is calculated as the sum of dividend and the share value. But when the company does Buyback from the investor with the premium upto 50%, it would create a return greater the return mentioned above, since in this case tax is being paid by the company and the investor pays 0% tax. So Buybacks highly boosts the confidence and returns of the company’s investors.
Buyback of Paytm:
The primary for a company to do a Buyback is that it should have made significant profit.The companies like TCS,Infosys and Wipro made huge profits
- TCS-$25.7 BILLION
- INFOSYS-$16.1 BILLION
- WIPRO-$10.42 BILLION
The above mentioned data(in 2022) justifies the Buybacks done by those companies. But Paytm on the other hand Paytm has widened its loss from Rs -1710 Cr to Rs -2942.36 Cr with increase in loss of 42%. Paytm doesn’t have even a decent profit to do Buyback and it also can’t use his IPO fund to do Buybacks. These facts have raised so many questions among the investors.
It clearly signifies that Paytm’s deal to Buyback clearly pointless, but there may be a secret plan beyond it or it is considered be a sort of scam to the investors.