Buyback

Indian Economy glossary

Also called: Share repurchase · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A buyback (also called share repurchase) is when a listed company uses its own cash to buy back its shares from its existing shareholders. This reduces the number of shares outstanding (shares held by investors).

It matters because it is one of only two corporate actions that send cash from the company to its owners. The other is a dividend. Because fewer shares remain, each remaining share gets a bigger part of the profit:

Earnings per share (EPS) = Net profit ÷ Number of shares outstanding

Explanation

How a buyback works

  • Corporate action means a decision by a listed company that changes what its shareholders own or receive.
  • In a buyback, three things happen:
  • The company pays cash to the shareholders who sell their shares.
  • The shares it buys back are cancelled, so fewer shares remain outstanding.

  • Surplus cash (cash the company does not need for its business) goes back to the owners.

  • Effect on EPS:

  • Profit stays the same, but it is divided among fewer shares.

  • So EPS rises.

  • Worked example:

  • Net profit is ₹100 crore and there are 10 crore shares, so EPS = ₹10.
  • The company buys back 1 crore shares, which leaves 9 crore shares.
  • New EPS = 100 ÷ 9 ≈ ₹11.1.

Methods of buyback

The SEBI (Buy-back of Securities) Regulations, 2018 allow these routes [1]:

  • (i) Tender offer:
  • The company makes an offer to all existing shareholders.

  • It accepts shares on a proportionate basis, meaning in proportion to each person's holding.

  • (ii) Open market: this has two sub-routes.

  • The book-building process (a process where the price is found from the bids investors place).
  • The stock exchange, where the company buys shares at market price over a period of time.

Approval limits

  • Up to 10% of paid-up equity capital and free reserves: a board resolution is enough [1].
  • Paid-up equity capital = the share money that shareholders have actually paid in.

  • Free reserves = past profits kept back that the company is free to use.

  • More than 10%: shareholders must pass a special resolution under the Companies Act, 2013 [1]. A special resolution needs at least 75% of the votes cast.

Why companies do it

  • It returns surplus cash when the company has no better use for the money.
  • It raises EPS, because profit is shared among fewer shares.
  • It signals confidence: the company is saying that it thinks its own shares are worth buying.
  • It can raise the promoters' share of the company, because they often do not sell while other shareholders do.

In India

  • Governing law: SEBI (Buy-back of Securities) Regulations, 2018, read together with the Companies Act, 2013 [1]. SEBI (Securities and Exchange Board of India, the stock-market regulator) frames and enforces these rules.
  • Open-market route via the stock exchange is not allowed from 1 April 2025 [1]. All buybacks since then use the tender offer route.
  • Why it was removed: in the stock-exchange route, the company buys at market price over a long period, so not every shareholder gets an equal chance to sell.

  • In a tender offer, every shareholder can take part in proportion to what they hold.

  • Latest figure: in 2024-25 there were 36 tender-offer buybacks [2].

  • Investor protection: after a tender offer closes, the company has 5 working days to do three things [1]:
  • tell shareholders which shares were accepted;
  • pay them;

  • return the shares it did not accept.

  • Tax: from October 2024, the money shareholders get from a buyback is taxed in their hands, like a dividend (verify current).

  • This follows the same logic as the abolition of Dividend Distribution Tax (DDT) in 2020. DDT was a tax the company paid before it distributed dividends. Today, dividends are taxed in the shareholder's hands at their slab rate.

Don't confuse with

  • Dividend: both send cash to shareholders. A dividend does not change the number of shares. A buyback reduces it.
  • Bonus issue: gives free extra shares by turning reserves into share capital. It raises no money and pays out no cash. A buyback pays out cash and reduces the number of shares.
  • Stock split: splits each share into more shares of lower face value (the value printed on the share). Total value and share capital stay the same. A buyback changes the number of shares because the company pays cash for them.
  • Delisting: permanent removal of a company's shares from a stock exchange. In a voluntary delisting, the promoter buys out the public shareholders. In a buyback, the company buys back only some shares and stays listed.

Prelims Hooks

  • Only dividends and buybacks send cash out of the company. A bonus issue and a stock split change only the number of shares.
  • A buyback reduces shares outstanding, so EPS rises (EPS = Net profit ÷ Number of shares).
  • Law: SEBI (Buy-back of Securities) Regulations, 2018 together with the Companies Act, 2013 [1].
  • The open-market route via the stock exchange is not allowed from 1 April 2025. Only the tender offer route remains, and shares are accepted on a proportionate basis [1].
  • A buyback of up to 10% of paid-up equity capital + free reserves needs only a board resolution. More than 10% needs a special resolution of shareholders [1].
  • In a tender offer, the company must confirm accepted shares, pay for them and return unaccepted shares within 5 working days of the offer closing [1].

Mains Points

  • Fairness among shareholders (GS-III, investor protection):
  • In the old stock-exchange route, the company bought at market price over a long period, so some shareholders were more likely to get their shares bought than others.
  • Allowing only tender offers from April 2025 [1] gives every shareholder an equal, proportionate chance to sell.

  • This builds trust among small investors, who now take a growing part in the stock market.

  • Tax neutrality:

  • Before October 2024, buybacks were often taxed more lightly than dividends. So companies liked to return cash through buybacks.
  • Taxing buyback proceeds in shareholders' hands, like dividends, removes that tax advantage.

  • The choice between a dividend and a buyback then depends on business reasons, not on tax. This is an example of tax neutrality (the tax system should not push firms towards one choice over another).

  • Capital use trade-off:

  • A buyback can put idle cash to good use and show that the company is confident.
  • Critics say it can raise EPS on paper without any growth in the business.
  • It can also mean that companies spend less on new investment, which the economy needs for growth and jobs.

Related concepts

Read more

Sources

  1. 1SEBI — FAQs on SEBI (Buy-back of Securities) Regulations, 2018 (April 2025)sebi.gov.in · tier 1
  2. 2SEBI Annual Report 2025-26, Chapter 3: Primary Marketssebi.gov.in · tier 1