Buy-back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces. A buy-back allows companies to invest in their own shares. Buy-back increases the proportion of shares a company owns by reducing the number of shares outstanding on the market.

Buybacks can be carried out in two ways:

• Companies buy back shares on the open market over an extended period of time.
  
• Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.

Most important reasons of Buyback of shares are –

1. Undervalued stock
   This is one of the main reasons why companies opt to buy back their shares. When the management feels that their stock is undervalued, they adopt the buyback route to rectify the stock price. The stock buyback reduces the number of shares in the market and thus gives a price boost to the remaining shares in the market.
   
   
2. Excess Cash with not many project opportunities
   A company with free reserves in hand but not many project opportunities would prefer to go for a buyback. The company would use the cash to reward the shareholders rather than keeping it idle in the bank account over the required amount.
   
   
3. Strengthen promoter holding in the company
   The company promoters can increase its stake in the company by forfeiting the buyback offer. This strengthens their hold over the company and acts as a defense strategy in the case of hostile takeovers.
   
   
4. To achieve optimum capital structure
   The capital structure of a company gets represented by its debt-equity ratio. Each industry has a different capital structure requirement. Some industries may not be suitable to rely on more debts, whereas some other business models may require large debts to run their business. Thus, as per the company requirement, a company may opt for buyback as a tool and repurchase its equity from the market to achieve an optimum capital structure.