Contents
Definition
A share buyback (or share repurchase) is a corporate action where a company uses its own funds to purchase outstanding shares from the market or existing shareholders, reducing the total shares outstanding. In India, buybacks are regulated by SEBI (Buy-Back of Securities) Regulations, 2018 and Section 68–70 of the Companies Act 2013. Buybacks are funded from free reserves, securities premium, or proceeds of earlier issuances of the same class — not from borrowed funds. Maximum buyback is 25% of paid-up capital + free reserves; maximum open-market buyback through stock exchange is 15% of paid-up capital + free reserves.
Mechanics & Timeline
Two primary routes:
1. Tender Offer Route:
- Board approves; shareholders approve via special resolution (if > 10% of paid-up capital + free reserves).
- Public announcement + Letter of Offer filed with SEBI.
- Record date set; shareholders tender shares via exchange platform.
- Pro-rata acceptance if oversubscribed; T+10 from offer close for settlement.
- Compulsory for buybacks > 15% of paid-up capital.
2. Open Market Route (Exchange):
- Board-only approval; stock exchange notified.
- Company repurchases shares through broker on exchange over up to 6 months.
- Maximum daily purchase: 25% of average daily volume of preceding 10 trading days.
- Trading window restrictions apply; insider trading norms strictly enforced.
Post-buyback: shares are extinguished (cancelled) — not held as treasury stock. Company must maintain 1:6 debt-to-equity ratio post-buyback.
Tax Treatment
Pre-Finance Act 2024 (up to September 30, 2024): Section 115QA levied 20% Buyback Distribution Tax (BDT) on the company; shareholders received tax-free proceeds.
Post-Finance Act 2024 (from October 1, 2024): Section 115QA was amended — BDT removed. Tax burden shifted to shareholders:
- Buyback proceeds received by shareholders now taxed as deemed dividend under Section 2(22)(f) — taxed at slab rate in the hands of the recipient (not flat capital gains rates).
- Cost of acquisition of tendered shares becomes a capital loss (allowable against capital gains in the same/future years).
- For NRIs: dividend income is taxed at 20% (plus surcharge + cess) or DTAA rate — no indexation benefit.
- Effective total tax (dividend + the disallowed capital loss offset) makes buyback less tax-efficient for individual shareholders post-2024 vs. open-market sale (which attracts LTCG/STCG).
Investor Protection
- Minimum buyback price (tender): Must be at or above the volume-weighted average price (VWAP) of the preceding 3 months — prevents below-market offers.
- Small shareholder reservation: Minimum 15% of buyback quantity reserved for small shareholders (holding ≤ ₹2 lakh value at record date).
- Escrow deposit: 25% of buyback consideration must be deposited in an escrow account before offer opens — ensures company cannot renege on committed buyback.
- Post-buyback restriction: Company cannot issue new equity shares for 1 year after buyback completion (prevents dilution reversal).
- Debt-equity ratio: Post-buyback secured debt cannot exceed 2× equity — prevents leveraged buybacks that destabilise capital structure.
Worked Example
TCS Buyback — FY2024 (October 2023):
- Route: Tender offer.
- Buyback price: ₹4,150 per share (premium of ~17% to then-market price of ~₹3,550).
- Total buyback size: ₹17,000 crore (~41 million shares).
- Acceptance ratio: Approximately 34% for retail shareholders (shares tendered exceeded shares accepted).
- Small shareholder quota: 15% reserved for holders with ≤ 200 shares — near-100% acceptance ratio for qualifying small shareholders.
- Tax note: This buyback was completed before October 1, 2024 — proceeds were received tax-free by shareholders under the then-applicable Section 115QA BDT regime.
Post Finance Act 2024, similar future buybacks would result in dividend taxation at slab rates for participating shareholders — a significantly different outcome especially for high-bracket individual investors.
See Also
Primary Source
SEBI Buy-Back of Securities Regulations 2018 — sebi.gov.in; Income Tax Act, Section 115QA (as amended by Finance Act 2024) — incometaxindia.gov.in
MintByte is registered with SEBI as an Investment Adviser (ARN-314872) and APMI (APRN-01658). This glossary entry is for educational purposes only and does not constitute tax or investment advice. The Finance Act 2024 buyback tax changes are complex; investors should consult a qualified tax professional for their specific situation.