SEBI & Securities Law

Buyback of Shares Under SEBI Regulations: Tender Offer vs Open Market Route

CA Nikhil Gupta·July 2026· SEBI (Buy-back of Securities) Regulations, 2018 SEBI COMPLIANCE

Reviewed by CA Nikhil Gupta · Last reviewed 17 July 2026

A company can't simply decide to buy back shares in whatever quantity and however it likes — SEBI's buyback framework caps the size relative to the company's own balance sheet, and increasingly channels the mechanics through a specific, more transparent route.

Why companies do buybacks

A buyback returns cash to shareholders by having the company itself purchase and extinguish a portion of its own outstanding shares — reducing share count (which can support earnings-per-share metrics), returning surplus cash without committing to an ongoing dividend policy, and in some structures, offering a more tax-efficient return of capital compared to dividends depending on the shareholder's specific tax position.

The size cap

The total value of a buyback is capped relative to the company's paid-up capital and free reserves:

A buyback approved by the board alone (without a shareholder special resolution) is capped at up to 10% of paid-up capital and free reserves.
A larger buyback, up to 25% of paid-up capital and free reserves, requires shareholder approval via special resolution.

A company cannot undertake more than one buyback within a specified cooling-off period after completing a previous buyback (generally within the same financial year), preventing buybacks from being used as a continuous, unrestricted mechanism for share-price support.

The post-buyback debt-equity condition

⚠ A buyback can't be funded in a way that over-leverages the company: Post-buyback, the company's debt-to-equity ratio (aggregate secured and unsecured debt owed by the company, relative to paid-up capital and free reserves) is generally required to stay within 2:1 — this condition exists specifically to prevent a company from funding an aggressive buyback through excessive new borrowing, which would use shareholder-supporting capital return to instead push financial risk onto the company's balance sheet.

Tender offer route — the main mechanism now used

Under the tender offer route, the company makes a public offer to buy back shares at a specified price through the stock exchange mechanism, with a defined reservation (currently 15%, subject to regulatory revision) for small shareholders — retail shareholders holding shares below a specified market value threshold — to ensure they aren't crowded out by larger, more sophisticated participants tendering disproportionately.

SEBI has, over recent regulatory cycles, moved to phase out the alternative open market buyback route (where a company bought back shares gradually through the secondary market rather than a defined tender offer), citing transparency and price-manipulation concerns with the open-market mechanism — companies planning a buyback should confirm the currently permitted route(s) against the latest SEBI regulations rather than assume the open market option remains available.

What happens to the bought-back shares

Shares acquired through a buyback must be extinguished and physically destroyed (in dematerialised form, this means cancellation in the depository system) within a specified period after the buyback closes — they cannot be held as treasury shares or reissued, which is a deliberate design choice under Indian company law distinguishing buybacks from the treasury-share practices permitted in some other jurisdictions.

Frequently Asked Questions

Can a company do a buyback and pay dividends in the same year? ▼

There is no absolute prohibition on doing both within the same financial year, but the company's overall capital allocation (buyback size, dividend payout) needs to remain within the applicable regulatory caps and the company's actual free reserves — practically, companies typically sequence and size these together as part of an overall capital-return strategy rather than treating them as fully independent decisions.

Do promoters typically participate in a company buyback? ▼

Promoters can participate in a buyback like any other shareholder (subject to the small-shareholder reservation not applying to them if they exceed the small-shareholder threshold), though large promoter participation in a buyback can itself raise governance questions about whether the buyback is genuinely benefiting all shareholders proportionately or disproportionately increasing promoter shareholding percentage post-buyback.

Is there a minimum size below which a buyback doesn’t need SEBI-level compliance? ▼

The SEBI Buy-back Regulations apply to buybacks by listed companies generally — there isn't a de minimis exemption from the core regulatory framework based purely on small buyback size, though the specific procedural requirements can vary based on whether the 10% board-approved threshold or the larger 25% shareholder-approved threshold applies.

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Primary category: SEBI & Securities Law
Official starting point: www.sebi.gov.in

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