Buyback Soon in Aarti Drugs: Will the Sixth Buyback Be Special?

Shares of Aarti Drugs touched an 11-month high on Thursday, surging in double digits after the company announced that its board would meet on August 26 to consider a buyback of its equity shares, which carry a face value of Rs 10. This upcoming buyback will mark the sixth such instance in the company’s history. But what makes this buyback potentially special? Let’s dive into the details.

Aarti Drugs: A History of Buybacks

Aarti Drugs has a well-established history of returning value to its shareholders through buybacks. The company initiated its first buyback in 2016 and has since repurchased shares in 2018, 2019, 2021, and most recently in 2023. This consistent strategy of buying back shares reflects the company’s confidence in its own financial health and its commitment to enhancing shareholder value.

Share Performance Ahead of the Buyback Announcement

The market’s reaction to the buyback announcement was swift and positive. Shares opened the session at Rs 590.05 and quickly climbed to an intraday high of Rs 599. Although the stock later retreated to Rs 578 by 10:30 AM, it still marked a nearly 8% increase from the previous day’s close, signaling strong investor confidence in the upcoming buyback.

Understanding the Regulatory Framework

As per SEBI regulations, a cooling-off period of 365 days is mandated between two successive share buybacks. Aarti Drugs had approved its last buyback on July 21, 2023, making the company eligible to announce another buyback. This careful adherence to regulatory guidelines underscores Aarti Drugs’ commitment to complying with market norms while optimizing shareholder returns.

Methods of Buyback: Tender Offer vs. Open Market

The buyback could be executed through either a tender offer or the open market mechanism. In recent times, many companies have preferred the tender offer route, where shares are repurchased at a predetermined price. This method provides shareholders with a clear exit opportunity at a premium, making it an attractive option for those looking to capitalize on the buyback.

Strategic Timing: Capitalizing on Tax Changes

Aarti Drugs’ announcement comes at a strategic time, just after Finance Minister Nirmala Sitharaman’s Budget 2024 introduced significant tax changes. Post-October 1, the income received on the buyback of equity shares will be taxed in the hands of the shareholder, a shift from the previous norm where the company bore the tax burden. This change has led to a flurry of buyback announcements as companies rush to capitalize on the current tax structure before the new rules take effect.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.