Usually a company buy back its shares when it predicts the future of the company is very promising and bright .
And the board of directors want to use the surplus cash they have to invest in their own shares. And if there is cash crunch in the future it will sell its share to raise funds.
Another important aspect of stock buyback is to take advantage of undervaluation. That is it will buy back when the share or stock value is less and will issue shares when the market is bullish.
Shares buy back of a company will increase the status of the company. A company listing its name in the stock exchange not only for money but also for reputation.
Another benefit from buy back is to reduce the amount of dividends it has to pay to the share holders.
As there is lesser shares in the market with few share holders, the voting rights will remain with the company.
Our country's largest software services firm, Tata consultancy Services(TCS) announced its board meeting last week that it will buy back its shares. Last year also TCS had undertaken buyback of 16,000 crores Rs worth shares from the market. This buy back will improve the earnings per share and return the surplus cash to share holders. This year also, TCS will buy back the same amount of 16,000 crores rupees worth shares as last year.
TCS announced bonus shares of 1:1 earlier this year and went on ex-bonus. According to SEBI's regulations 15%of the buyback shares should be from small investors who are holding 1 to 100 shares per person.
Indian IT companies are usually under compulsion to return their excess cash to shareholders via shares buyback or generous dividends. Last year Infosys and HCL also undertook buyback.