A share buyback is when a company uses its own cash to purchase its shares back from shareholders, reducing the total number of shares in existence. In India it happens through one of two routes: a tender offer at a fixed price, or gradual buying in the open market.
Why would a company buy back its own shares?
A company sitting on surplus cash can return it to shareholders either as a dividend or by repurchasing shares. A buyback shrinks the share count, so future profits are divided among fewer shares, each remaining share represents a slightly larger piece of the business. Managements also use buybacks to signal that they consider the shares undervalued, though a signal is only an opinion, not a promise.
The shares the company buys back are extinguished, cancelled, not resold later.
What is the tender offer route?
In a tender offer, the company announces a fixed buyback price (usually above the current market price), a total buyback size, and a record date. If you hold the shares on the record date, you receive an entitlement to tender (that is, to offer) a certain number of your shares back to the company during a set window.
Suppose Kaveri Motors announces a buyback at ₹1,150 while the stock trades at ₹980. Joseph holds 100 shares on the record date and tenders 40. Whether all 40 are accepted depends on the acceptance ratio: if too many shareholders tender, the company accepts shares proportionately and returns the rest to their demat accounts. Accepted shares are taken from your demat, and the money is paid to your bank. A portion of every tender-route buyback is reserved for small shareholders, which is why smaller holders sometimes see better acceptance ratios.
Tendering is done through your broker within the window. The exact steps on Rupeezy are covered in how to participate in a buyback tender offer. Eligibility follows the record-date logic explained in what is the difference between record date and ex-date.
What is the open market route?
Here there is no fixed price and nothing for you to apply for. The company simply buys its shares on the exchange over a period, up to a maximum price and total amount it has announced, like any other market participant. If you sell during that period, you may or may not be selling to the company. You can't tell, and it doesn't matter; you just receive the market price. Regulations around this route have been tightened over time, and tender offers are now the dominant route.
| Tender offer | Open market | |
|---|---|---|
| Price | Fixed, announced upfront | Market price, up to a cap |
| Your action | Tender shares in a window | Ordinary sell order, if you choose |
| Acceptance | May be partial (acceptance ratio) | Whatever you sell, you sell |
| Record date needed | Yes | No |
Things to keep in mind
- In a tender offer, acceptance is rarely 100%. Plan for some of your tendered shares to come back to you.
- The market price can drift below the buyback price after the buyback ends, so tendering is not a risk-free arbitrage.
- Taxation of buyback proceeds has changed over the years. Check the current treatment for the year you tender.
- A buyback returns cash but also means the company found no better use for it; read it in context rather than as automatic good news.
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