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