Globally buybacks can be of two types. Companies can buy back shares and hold it in a treasury account for trading in shares. Alternatively, the company can buy back shares and extinguish the shares and improve the EPS for shareholders. In India only the second option is allowed. Treasury with buyback is not permitted. In a buyback the company buys back its own shares. It is one more way of rewarding the shareholder apart from dividend. Shareholders are able to tender their shares in the buyback and get their money back. Most buybacks are done at a premium to the market price and that becomes profitable to shareholders.

Take the case of Infosys. The stock was quoting between Rs.900 and Rs.950 but the buyback price has been set at Rs.1150 leaving a clear upside margin for shareholders. There are two more positive fallouts of a buyback. Firstly, the buyback leads to the bought back shares being extinguished. Thus the number of outstanding shares reduces and that increases the EPS of the company. That is likely to be value accretive. Secondly, when the company commits to buyback the stock at a certain price, it is interpreted as an indication that the company has the confidence to buy the stock at that price. That acts as a psychological base price for the stock.