Share Buyback 2020: Basics of Share Buyback

Share buybacks have emerged as one of the most influential corporate actions in 2025, reshaping how companies return cash to shareholders and optimise their capital structure. With rising cash balances, stable profitability, and a maturing corporate ecosystem in India, more firms are actively repurchasing their shares. For investors, understanding the mechanics, benefits, risks, and regulatory framework of buybacks is essential for making informed decisions. A share buyback, when executed strategically, strengthens financial ratios, supports valuations, and signals management’s confidence in the company’s long-term prospects. However, not all buybacks create value—making proper analysis crucial.

What Is a Share Buyback?

A share buyback is a corporate action where a company repurchases its own shares from shareholders or directly from the open market. Once repurchased, these shares are extinguished, resulting in a lower number of outstanding shares. This directly impacts metrics such as Earnings Per Share (EPS) and Return on Equity (ROE), often improving them.

For example, a company earning ₹100 crore with 100 crore shares outstanding has an EPS of ₹1. If it buys back and cancels 20 crore shares, EPS rises to ₹1.25—even without any change in profit. This mechanical improvement is one of the key reasons why companies prefer buybacks. fileciteturn0file0

Why Do Companies Undertake Share Buybacks?

Companies initiate buybacks for several strategic reasons, each reflecting a specific corporate objective:

1. Returning Surplus Cash  

Cash-rich companies may not always find attractive expansion opportunities. Instead of hoarding cash or committing to recurring dividends, they may choose a buyback as a flexible, one-time method to reward shareholders.

2. Boosting Earnings Per Share (EPS)  

By reducing the number of shares in circulation, EPS increases automatically. A higher EPS can improve valuation metrics such as P/E ratio, making the company appear stronger financially.

3. Supporting Share Price During Volatility  

During periods of market uncertainty, companies may use buybacks to stabilise share prices and enhance investor confidence.

4. Signalling Undervaluation and Management Confidence  

When management believes the stock is undervalued, buybacks act as a strong positive signal. It shows the company believes its intrinsic value is higher than the market price.

5. Increasing Promoter Shareholding  

If promoters do not tender their shares in a buyback, their ownership percentage increases automatically without additional investment.

6.Tax Efficiency  

For certain categories of investors, buybacks can be more tax-efficient than dividends, especially when dividend distribution tax structures change.

Types of Share Buybacks

Companies may choose different buyback routes depending on their objectives, liquidity position, and regulatory preferences:

1Tender Offer Buyback  

Shareholders are invited to tender their shares at a fixed price. If more shares are tendered than required, acceptance is done proportionately.

2. Open Market Buyback  

The company purchases shares directly from the stock exchange over a specified window. Prices vary depending on market conditions. This method offers flexibility but provides lower certainty for investors.

3.Book-Building Route  

Used within open-market buybacks, the price is determined based on bids received, similar to IPO book-building.

4. Odd-Lot Buyback  

Designed for shareholders who hold small or odd quantities of shares, helping them exit conveniently.

Share Buyback Process (Step-by-Step)

A buyback follows a structured and transparent process to protect shareholder interests.

1. Board Approval  

If the buyback size is up to 10% of the company’s net worth, the board can approve it directly. Larger buybacks require shareholder approval.

2. Public Announcement  

Detailed disclosures are made, specifying buyback size, method, record date (for tender offers), pricing, rationale, and timelines.

3. Regulatory Filings  

Mandatory filings are made with stock exchanges and with SEBI for compliance purposes. fileciteturn0file0

4. Record Date  

Applicable for tender offers. Only shareholders on this date are eligible.

5. Execution of Buyback  

In tender offers, shareholders submit shares within a window. In open-market buybacks, the company buys shares gradually at prevailing prices.

6. Extinguishing Shares  

All repurchased shares must be extinguished within a defined time period, reducing the share count formally.

7. Post-Buyback Reporting  

Companies must report completion status, number of shares extinguished, and financial impact.

SEBI Rules for Share Buybacks in 2025

SEBI has clearly defined regulations to ensure transparency and fairness:

• Companies may buy back up to 25% of their paid-up capital and free reserves.  
• The debt-to-equity ratio after buyback cannot exceed 2:1.  
• Buybacks above 10% require shareholder approval through a special resolution.  
• A cooling-off period of 12 months is mandatory between two buybacks.  
• Open-market buybacks must utilise at least 75% of the allocated amount.  
• At least 40% must be spent in the first half of the buyback window.  
• All disclosures relating to pricing, rationale, financing, and execution status are mandatory. fileciteturn0file0

Impact of Share Buybacks on Shareholders

Short-Term Effects  

In the short term, buybacks often lead to price appreciation due to reduced supply, premium tender pricing, and improved investor sentiment.

Long-Term Effects  

Long-term effects include:

• Higher EPS and ROE  
• Better capital efficiency  
• A more optimised balance sheet  
• Potential rise in promoter ownership  
• Improved perceived valuation  

Tax Considerations  

Tax treatment varies depending on the route and investor type. Investors must evaluate post-tax returns before participating.

Share Buybacks vs Dividends: Which Is Better?

Dividends offer consistent payouts, whereas buybacks offer flexibility and potential tax benefits.

In 2025, many companies prefer buybacks due to their tax and capital structure advantages.

Recent Buyback Trends in India

• Large technology firms are conducting premium tender offers to return cash.  
• Manufacturing and mid-cap companies are relying on open-market buybacks to stabilise valuations.  

These shifts indicate growing maturity in capital allocation policies. fileciteturn0file0

Advantages of Share Buybacks

• Enhances EPS and financial ratios  
• Optimises capital structure  
• Supports share price  
• Indicates confidence in long-term growth  
• Flexible method of shareholder payout

Disadvantages of Share Buybacks

• May inflate EPS artificially  
• Reduces cash available for expansion  
• Poor timing can destroy value  
• Could suggest limited growth opportunities if done excessively

What Investors Should Analyse Before Participating

Investors must evaluate:

• Buyback price vs market price  
• Company’s cash flow and funding source  
• Core fundamentals and sector outlook  
• Historical buyback performance  
• Promoter participation in tender offers  
• Acceptance ratio expectations  

Conclusion

Share buybacks in 2025 remain a powerful tool for companies to optimise financial metrics, reward shareholders, and strengthen market confidence. However, not every buyback creates value. Investors should study valuation, fundamentals, regulatory compliance, and buyback structure before participating. When analysed correctly, buybacks can offer meaningful long-term benefits, reduce outstanding shares, and enhance shareholder wealth. Companies with strong balance sheets, sustainable cash flows, and transparent governance tend to execute the most value-accretive buybacks—making them attractive opportunities for informed investors.