The buyback glossary

A share buyback is a company using its own cash to purchase its shares back from shareholders. The shares bought are cancelled, so the total share count falls permanently.

In India buybacks are governed by the Companies Act, 2013 and the SEBI (Buyback of Securities) Regulations, 2018. They are a way of returning surplus cash to shareholders, and an alternative to paying a dividend.

Companies run buybacks to return surplus cash they cannot deploy productively, to signal that the board considers the stock undervalued, to improve earnings and return on equity per share, or to raise promoter holding without buying in the market.

The signal is not always reliable. A buyback funded from borrowings, or launched at a stretched valuation, destroys value rather than returning it.

The SEBI (Buyback of Securities) Regulations, 2018 set out the permitted routes, size limits, approval requirements, timelines, escrow obligations and disclosure duties for buybacks by listed companies.

They sit alongside Sections 68 to 70 of the Companies Act, 2013. Amendments in 2023 progressively tightened the open market route, and unlisted buybacks are governed by the Companies Act alone.

The public announcement is published in newspapers and filed with the exchanges after the buyback is approved. It states the route, the buyback price, the number of shares, the record date and the offer timetable.

It is the point at which the offer becomes binding on the company, and the reference document until the letter of offer arrives.

The letter of offer goes to every shareholder on the register as of the record date. It carries the buyback price, the total size, each holder’s entitlement, the tendering window and the procedure to follow.

It is filed with SEBI, which may issue observations before it is dispatched. In practice most shareholders now tender through their broker’s platform rather than returning any form from it.

In a tender offer the buyback price is a single fixed figure, typically set well above the prevailing market price to make participation worthwhile.

The premium is the incentive to tender, but it is not the return you earn. Because only a fraction of the shares tendered is usually accepted, the realised gain depends on the acceptance ratio.

In a tender offer, the company fixes a price and a record date, allots each eligible shareholder an entitlement in proportion to their holding, and opens a window in which shares can be tendered through the exchange mechanism.

It is the shareholder-friendly route: everyone on the register gets a proportionate chance at the same price, and small shareholders get a reserved slice. It is now effectively the only route available to listed Indian companies.

In an open market buyback, the company buys its own shares through normal exchange transactions over a period, up to a stated maximum price and total size, with daily disclosure of purchases.

Shareholders receive no entitlement and no reserved portion — only those who happen to sell while the company is buying participate. SEBI progressively restricted the route and it has been phased out for listed companies.

The 2023 amendments to the buyback regulations set a glide path for the open market route: the ceiling was cut in stages, disclosure was tightened, and the stock exchange route was discontinued from 1 April 2025.

The stated reasons were the route’s inefficiency and its unequal treatment of shareholders. Companies wanting to buy back must now use the tender offer route.

An open market buyback declares a maximum price rather than a fixed one. The company may buy at or below it, and stops if the market trades higher.

This is why open market buybacks often fall well short of their announced size: a rising price makes the ceiling unreachable.

The record date fixes eligibility. Only shareholders on the register at the end of that day receive an entitlement, and shares must be in the demat account by then — which means buying at least one settlement cycle earlier.

Buying after the record date gives you shares but no entitlement, though you can still tender them in the general category.

The entitlement ratio defines the guaranteed portion: a ratio of 1:9 means one share may be tendered for every nine held on the record date.

Shares can be tendered above the entitlement, and those extra shares are considered only if the offer is not fully taken up by others. The ratio is calculated separately for the small shareholder category and the general category.

A small shareholder is one holding shares with a market value of up to two lakh rupees as on the record date, measured at the reference price prescribed in the regulations.

The classification is made by the registrar and cannot be chosen. It matters a great deal, because the small shareholder category carries a reservation and usually a far better acceptance ratio.

Fifteen percent of the shares in a tender offer buyback are reserved for small shareholders. Because that group typically holds far less than 15 percent of the company, acceptance ratios in this category run much higher than in the general one.

This is why holdings are sometimes deliberately kept just under the two lakh rupee threshold ahead of an expected buyback.

The tendering period is the window — typically five working days — in which shares can be submitted into the buyback through the exchange acquisition window.

Tenders can be placed, modified or withdrawn while the window is open. Shares not tendered by the closing time simply stay in your account.

Shareholders participate by instructing their broker to place a tender in the exchange acquisition window during the offer period. The shares are blocked in the demat account against the tender.

Most brokers expose this as a simple corporate-action or offer-for-sale screen. There is no separate physical form to send to the registrar.

The acquisition window is a dedicated facility on the BSE and NSE used for buybacks, delisting offers and open offers. Tenders are placed into it rather than into the normal order book.

Settlement of accepted shares and return of unaccepted shares both run through this mechanism, handled by the clearing corporation.

The acceptance ratio is the percentage of shares tendered that is ultimately accepted. If you tender 100 shares and 32 are bought, the acceptance ratio was 32 percent.

It is only known after the offer closes and is published in the post-offer announcement. It is usually much higher for small shareholders than for the general category, and it is the single number that determines whether tendering was worthwhile.

Buyback arbitrage means buying shares ahead of the record date to capture the premium between the market price and the buyback price.

The trade is not risk-free. Only part of the tendered holding is accepted, and the unaccepted balance is returned — usually after the price has fallen back once the buyback support disappears. The gain on the accepted portion has to cover the loss on the rest.

The total amount of a buyback cannot exceed 25 percent of paid-up capital and free reserves, computed on audited accounts. For equity shares there is a further condition that the buyback cannot exceed 25 percent of the paid-up equity capital in a financial year.

These ceilings limit how much cash can be returned in one go, and are the reason large cash-rich companies run buybacks in successive years.

The board alone may approve a buyback of up to 10 percent of paid-up capital and free reserves. Anything larger, up to the 25 percent ceiling, requires a special resolution of shareholders, usually by postal ballot.

The approval route determines the timetable, since a shareholder vote adds several weeks before the public announcement can follow.

A company’s borrowings must not exceed twice its paid-up capital and free reserves after the buyback. Because a buyback reduces reserves, a leveraged company can be barred from one entirely.

The test is applied on a standalone and, where applicable, consolidated basis, and the board must certify compliance.

Before a tender offer opens, the company must place a prescribed percentage of the total consideration into an escrow account, in cash, bank guarantee or deposited securities.

The escrow guarantees that shareholders will be paid, and SEBI can direct forfeiture if the company fails to complete the offer.

A company must wait a prescribed period — one year from the expiry of the previous buyback — before launching another. It also cannot raise capital of the same class for a specified period afterwards.

The restriction stops buybacks being used to manage the share price on a rolling basis.

A company must deploy at least the prescribed minimum proportion of the announced buyback size — historically 50 percent, raised for the open market route before it was discontinued — failing which the escrow may be forfeited.

Tender offers are almost always fully utilised, since the price is fixed and the entitlement mechanism ensures take-up.

Once the offer closes, the registrar finalises acceptance and the clearing corporation settles: accepted shares are debited from the demat account and the consideration is credited to the linked bank account.

Payout typically completes within a couple of weeks of the offer closing, in line with the timetable in the letter of offer.

Shares tendered but not accepted are returned to the demat account, usually within a few days of settlement.

They come back at the prevailing market price, which is often lower than the price before the buyback, since the temporary buying support has gone. This return leg is where most of the risk in buyback arbitrage sits.

Shares acquired in a buyback must be extinguished — physically destroyed in the case of certificates, and debited from the depository record for demat holdings — within the prescribed period after settlement.

They cannot be held as treasury stock or reissued, which is why an Indian buyback permanently reduces the share count.

Because the share count falls, everyone who did not sell owns a slightly larger share of the company. The post-buyback shareholding pattern is filed with the exchanges after completion.

If promoters tender proportionally less than the public, their percentage holding rises without them buying a single share.

Promoters must declare in the public announcement whether they intend to participate. If they abstain, their percentage stake rises as other shares are cancelled, and the acceptance ratio for public shareholders improves.

If they tender in full, the exercise is closer to a proportionate cash return with control unchanged.

Cancelling shares raises earnings per share arithmetically, because the same profit is divided among fewer shares. Return on equity rises too, since the equity base shrinks.

The improvement is real but mechanical. It says nothing about the underlying business, and it comes at the cost of the cash spent.

A dividend pays every shareholder proportionately whether they want it or not. A buyback pays only those who tender, and lets the rest increase their proportionate ownership instead.

Buybacks were historically favoured for their tax treatment. Since October 2024 buyback proceeds are taxed as deemed dividend in the shareholder’s hands, which has largely removed that advantage.

For buybacks completed on or after 1 October 2024, the entire consideration received is treated as a deemed dividend in the shareholder’s hands and taxed at the applicable slab rate under income from other sources. No deduction is allowed against it for the cost of the shares.

The company-level buyback tax was withdrawn at the same time. For investors in higher slabs this materially reduces the post-tax attraction of tendering.

Section 2(22)(f) treats any payment by a company on the buyback of its own shares as a dividend in the shareholder’s hands. The full amount received is taxable — not the gain over cost.

Tax is deducted at source by the company at the applicable rate, and the income is reported under income from other sources in the return.

Since the whole buyback consideration is taxed as a deemed dividend, the sale value of the tendered shares is treated as nil and the acquisition cost becomes a capital loss.

That loss can be set off against capital gains and carried forward under the normal rules, which softens the impact — but only for a taxpayer who has capital gains to absorb it.

Under Section 115QA, applicable to buybacks before 1 October 2024, the company paid a 20 percent tax plus surcharge and cess on the distributed income, and the amount received by the shareholder was exempt.

That regime made buybacks attractive to shareholders in high tax brackets. It no longer applies to new buybacks, but it remains relevant when reading older announcements and comparing historical returns.