How money is made in a buyback

What a buyback is

A buyback is a company returning cash to its shareholders by repurchasing its own shares. The shares it takes back are extinguished, so each remaining share is a slightly larger part of the company.

SEBI caps how much a company may spend: 25% of its paid-up capital and free reserves, on the standalone or consolidated accounts, whichever is lower (Reg 4(i)). Up to 10% needs only a board resolution; above that, shareholders must pass a special resolution (Reg 5(i)(b)). After the buyback the company’s debt may not exceed twice its equity (Reg 4(ii)).

The two routes

SEBI allows a buyback through a tender offerTender offer. A buyback at one fixed price for a fixed number of shares, open to every holder on the record date for five working days. Learn more or through the open market (Reg 4(iv)). They work so differently that the site treats them as two kinds of event.

The open-market route was shut from 1 April 2025 to 31 July 2026 and reopened from 1 August 2026 by the Buy-Back (Amendment) Regulations, 2026. A company using it must spend at least 75% of the amount it set aside, and 40% within the first half of the window (Reg 15), and must keep 25% of that amount in escrow (Reg 20).

How money is made in a tender offer

The company names a buyback price, usually above the market price. Every share it accepts is paid that price. Every share it does not accept comes back to you, and is worth whatever the market pays for it after the window, which is often less than before the announcement once the buyback demand is gone.

So the gain is roughly: (buyback price − market price) × shares accepted, less any fall in the price of the shares that come back. Everything turns on how many are accepted, which is the acceptance ratioAcceptance ratio. The share of tendered stock a buyback actually takes. Tender 100 shares against a 30% acceptance and 30 are bought; the rest return to your demat. Learn more.

The acceptance ratio, in one paragraph

On the record date the company works out an entitlementEntitlement. The number of shares per holding a buyback guarantees to accept, set from record-date holdings, for example 11 for every 71 held. Learn more for each category: so many shares accepted for every so many held. Shares up to your entitlement are accepted for certain if you tender them. Many holders do not tender at all, and their unused entitlement is shared among those who tendered more than theirs. The final acceptance ratio is accepted shares divided by tendered shares, and it is usually well above the entitlement for that reason. Level 2 works it through step by step.

The 15% kept for small shareholders

A small shareholderSmall shareholder. In a buyback, a holder whose shares are worth up to ₹2 lakh at the record-date close. At least 15% of a tender buyback is kept for them. Learn more is one whose shares are worth up to ₹2 lakh at the closing price on the record dateRecord date. The day whose closing holdings decide who is entitled. Shares acquired on the record date itself settle too late to count. Learn more, on the exchange with the highest trading volume (Reg 2(i)(n)). Holdings in demat accounts with the same PAN sequence are added together for this test (Explanation to Reg 9(ix)).

Of the shares a tender offer repurchases, 15% or the small shareholders’ entitlement by holding, whichever is higher, is reserved for them (proviso to Reg 6). Because small holders usually own far less than 15% of a company, the reserved pool is large against their holdings, and their entitlement ratio is several times the general category’s.

Record date and timing

The record date decides who is entitled. Indian shares settle one trading day after the trade, so shares acquired on the record date itself arrive too late to count; they need to be acquired at least one trading day earlier.

The tender window opens within 4 working days of the record date (Reg 9(v)) and stays open for 5 working days (Reg 9(vi)). You tender through your broker, who places a lien on the shares; accepted shares are paid for after the window closes and the rest are released.

How money is made in an open-market buyback

There is no premium paid to holders and nothing is reserved for anyone. The company places orders on the exchange like any other participant, at prices up to its maximum priceMaximum price. In an open-market buyback, the highest price the company will pay on the exchange. A ceiling, not a price offered to holders. Learn more, which is a ceiling and not an offer. Its effect on a holder is indirect: steady demand in the market for the length of the window. The window can close early once the money set aside is spent, and the company must use at least 75% of it.

How the money is taxed

The rules changed twice in eighteen months.

The 2026 change came with the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026. The Finance Act, 2026 (Act No. 4 of 2026) moved buyback proceeds from dividend to capital gains under it, from the same date (its section 1(2)(a)).

What can go against you

• Acceptance lower than expected, when more holders tender than usual.
• The price of the returned shares falling once the window closes.
• In an open-market buyback, the company spending less than the full amount, or the window closing early.
• The market price rising to meet the buyback price before the record date, leaving little premium.