Share buybacks

What a buyback is

In a buyback, a company uses its own money to buy back some of its shares from shareholders. The shares bought back are cancelled, so the number of shares in issue falls. It is one way for a company to return cash to shareholders, along with dividends.

Buybacks are governed by SEBI’s Buy-Back of Securities Regulations, which limit how much a company can buy back and set out how it must be done.

Tender offer

In a tender offer, the company announces a fixed buyback price, the number of shares it will buy and a record date. Shareholders on the register on the record date can offer (tender) their shares through their broker during the offer period.

If more shares are tendered than the company wants to buy, each shareholder’s tender is accepted in proportion. This is the acceptance ratio. If the ratio is 20%, a shareholder who tendered their full entitlement would have about one in five of those shares bought back, and the rest returned to their demat account.

The small shareholder reservation

In a tender offer, 15% of the shares being bought back, or the small shareholders’ entitlement if higher, is kept for small shareholders. A small shareholder is one whose holding is worth up to ₹2 lakh, based on the market price on the record date. Because this group is smaller, its acceptance ratio is often different from that of other shareholders.

Each shareholder has an entitlement, worked out from their holding on the record date. They can tender more than their entitlement; the extra is accepted only if others tender less than theirs.

Open market buyback

In an open market buyback, the company buys its shares on the stock exchange over a period, up to a maximum price, instead of inviting tenders. Shareholders who sell on the exchange during that time may be selling to the company without knowing it, and there is no record date or acceptance ratio.

SEBI has changed the rules for open market buybacks more than once in recent years, including whether and how much they can be used. Check SEBI’s current buyback regulations for the position today. The offer document of each buyback says which route the company is using.

What to read

The public announcement and the letter of offer give the price, the size, the record date, the entitlement ratios for each category and the timetable. Tax treatment of buybacks has changed in recent years, so the current rules are best checked with the Income Tax Department or a tax adviser.