A buyback is when a company buys its own shares from existing shareholders, usually at a price above the market price, and then cancels them. It reduces the number of shares outstanding, so earnings per share rises for the same profit, and it is one way a company with surplus cash can return money to shareholders besides paying dividends. Buybacks can be made through a tender offer, where shareholders tender shares at a fixed price within a window, or on the open market. In a tender offer, a part of the buyback, at least 15 percent, is reserved for small shareholders, those holding shares worth up to Rs 2 lakh. The company must follow limits under the Companies Act and SEBI rules, including a cap on the amount that can be spent in relation to its net worth and paid-up capital, and approval from the board and in some cases shareholders. Companies cannot do a buyback right after an IPO; there are restrictions on buying back shares issued within a recent period. For investors, a buyback signals management’s belief that shares are undervalued, but it can also be used to prop up the price. Tax treatment has changed in recent years, so check the current rules.
Example: A company with 10 crore shares offers to buy back 50 lakh shares at Rs 200 when the market price is Rs 170. Shareholders can tender shares at Rs 200, and the shares bought are extinguished, leaving 9.5 crore.