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What is a share buyback and should you tender
A share buyback is a corporate action where the company buys back its own shares from existing shareholders, usually at a premium to market price. The 2024 budget changed the tax treatment so buyback proceeds are now taxed as dividend income in shareholders' hands.
In one line
A buyback is when a company purchases its own shares, reducing the shares outstanding and returning cash to shareholders, usually via a tender offer at a premium to the current market price or through open-market purchases on the exchange, and since the Finance (No.2) Act 2024, the proceeds are taxed as dividend income in the shareholder's hands at their applicable income slab rate.
BazaarBaaziSource & method
Why companies run buybacks
A company with excess cash and no compelling investment opportunity can return that cash to shareholders in 2 main ways: a dividend or a buyback. A buyback is often preferred by management when they believe the stock is undervalued, because it demonstrates conviction by putting real capital behind that belief. Buying back shares also reduces the total count outstanding, which mechanically increases earnings per share even if absolute profits are flat, since the same earnings are now divided across fewer shares.
Companies also use buybacks as a tax-efficient alternative to dividends, though as of October 2024 that tax advantage has been removed in India. Previously, the company paid a buyback tax of 20% and shareholders received proceeds tax-free. The Finance (No.2) Act 2024 abolished the company-level buyback tax and instead taxes the proceeds in shareholders' hands as deemed dividend income at their applicable income slab rates, making the tax treatment identical to a dividend.
Tender offer vs open market: how the two routes work
In a tender offer buyback, the company announces a buyback price (always at a premium to the current market price, as required by SEBI regulations) and a buyback size. Shareholders tender their shares by a specified date. If the response exceeds the buyback size, shares are accepted on a pro-rata basis, meaning each tendering shareholder gets only a portion of their tendered shares bought back.
In an open-market buyback, the company buys its shares through normal stock exchange transactions over a specified window, subject to SEBI limits on quantity and price. Retail shareholders do not need to do anything specific for an open-market buyback as they can simply sell on the exchange if they choose. Open-market buybacks are more flexible for the company but give shareholders less certainty of participation than a tender offer.
Deciding whether to tender
If the buyback price is above the current market price, tendering at least a portion of your holding realises a certain gain at the premium price. If the pro-rata ratio is low (say 20%), only a fraction of your tendered shares will actually be bought back, and the rest are returned to you, which is not a loss but is a friction to plan around.
If the market price is already close to or above the buyback price due to arbitrage buying after the announcement, tendering may offer little advantage over selling on the market. The practical assessment is straightforward: compare the buyback price to the current market price, estimate the likely acceptance ratio from the announcement details, and weigh whether the marginal premium justifies the administrative process of tendering. Tax on the proceeds has become a slab-rate item post October 2024, so higher-slab investors receive less net after tax than they did under the old regime.
FAQ4 reader questions · AEO-eligible
Common questions on what is a buyback.
What happens to a stock price during a buyback?
Buyback announcements typically push the stock price up toward the buyback price because arbitrageurs and investors anticipate the premium. After a tender offer closes, the remaining market price depends on the business fundamentals and market conditions.
How is a buyback taxed after the 2024 budget?
Under the Finance (No.2) Act 2024, buyback proceeds are taxed as dividend income in the shareholder's hands at their applicable income slab rate. The old regime where the company paid a 20% buyback distribution tax and proceeds were tax-free for shareholders was abolished effective October 2024.
Should I always tender in a buyback?
Not necessarily. It depends on the premium offered, the acceptance ratio, the tax impact at your income slab, and your view on the stock's long-term value. These are factors to assess case by case.
What is pro-rata acceptance in a buyback?
When more shares are tendered than the company is offering to buy, SEBI requires pro-rata acceptance. Each tendering shareholder gets a fraction of their tendered shares bought back, equal to the ratio of the buyback size to total shares tendered.
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