Share Buyback Explained: Meaning, Tender Offer Process, Taxes & Example

A buyback, also known as a share repurchase, is a corporate action where a listed company purchases its own shares from its shareholders. Instead of relying on the market price, companies typically offer a premium, which means the buyback price is higher than the current market value.

Many fundamentally strong companies prefer buybacks because they reduce the number of outstanding shares, improve Earnings Per Share (EPS), and indicate management’s confidence in future growth. As the number of shares decreases, the ownership percentage of remaining investors increases.

Why Do Companies Buy Back Shares?

Companies announce buybacks for several strategic reasons. Some of the common motivations include:

• Excess cash reserves

• Improving EPS

• Supporting the stock price

• Returning money to shareholders

• Showing confidence in future performance

• Strengthening financial ratios like ROE

These actions often signal that the company believes its shares are undervalued and worth repurchasing.

How Does a Buyback Work?

Currently, only one type of buyback is allowed. Since April 1, 2025, SEBI regulations have discontinued open-market buybacks. As a result, only tender offer buybacks remain active.

Tender Offer Buyback (Active Method)

Under the tender offer method, the company invites eligible shareholders to sell their shares at a fixed buyback price.

Step-by-Step Buyback Process

Here’s how it typically works:

1. The company announces the buyback with details such as price, record date, and entitlement ratio.

2. You must hold shares before the record date to become eligible.

3. Your entitlement is calculated based on the number of shares you own.

4. During the buyback window, you can tender your shares through your broker (Zerodha, Groww, Upstox, etc.).

5. Shares are accepted according to the final acceptance ratio.

6. Any unaccepted shares return to your demat account.

7. The buyback amount is credited directly to your bank account.

Important Points

• You may apply for more shares than your entitlement.

• However, acceptance of extra shares depends entirely on the final acceptance ratio.

• Refund of unaccepted shares takes place immediately after the offer closes.

Open Market Buyback (Discontinued)

Earlier, companies could repurchase shares directly from the stock exchange.
However, SEBI banned this method from April 1, 2025 to ensure transparency and protect retail investors.

New Tax Rules on Buyback (Very Important!)

The tax treatment changed drastically in 2024. Here’s how it works now:

Buybacks Before 1 Oct 2024

• The company paid a 20% buyback tax.

• Shareholders received the entire amount tax-free.

Buybacks On or After 1 Oct 2024

• The shareholder pays the tax.

• The buyback amount is treated as deemed dividend.

• It is taxed as per your income tax slab.

Capital Loss Benefit

The acquisition cost of shares tendered in the buyback is considered a capital loss.
You can:

• Set it off against other capital gains

• Carry it forward for up to 8 years

This lowers your tax burden from other stock market profits.

Infosys Buyback 2025 – Complete Example

Buyback Details

Buyback Timeline

Entitlement Ratios

Buyback Example for Clarity

Assume you hold 110 shares on the record date.
Entitlement ratio = 2 out of every 11 shares

Step 1 — Entitled Shares

(110 ÷ 11) × 2 = 20 shares

Step 2 — Tender More Shares

You may tender 50 shares if you wish.

Step 3 — Acceptance Ratio

Final acceptance ratio = 40%

Accepted = 50 × 40% = 20 shares
Unaccepted = 30 shares (returned)

Step 4 — Payout

Buyback price = ₹1,800
Accepted shares = 20

Total credit = ₹36,000

Step 5 — Tax Deduction

If you’re in the 20% slab:

Tax = ₹36,000 × 20% = ₹7,200
Net amount = ₹28,800

Additionally, you can claim capital loss for tax optimization.

Benefits & Risks of Buybacks

Benefits

• Premium price = higher gains

• Supply reduction boosts stock strength

• Capital loss benefits help reduce taxes

• Provides a stable exit opportunity

• Indicates strong financial health

Risks

• Acceptance ratio may be low

• Post-2024 taxes reduce net returns

• Share price may drop after buyback closes

Final Thoughts

Buybacks often provide excellent opportunities for retail investors—especially when the company is strong and offers a high premium. Nevertheless, after the 2024 tax change, calculating post-tax profits becomes essential. By understanding the timeline, acceptance ratio, and tax treatment, you can make smarter decisions during any buyback event.

FAQs About Stock Buybacks

1. What is a share buyback?

A share buyback occurs when a company repurchases its own shares from existing shareholders, typically at a premium to the market price. This process reduces the number of outstanding shares in the market and can increase shareholder value by boosting earnings per share and returning excess capital to investors.

2. Why do companies conduct buybacks?

Companies initiate buybacks for several strategic reasons: to return excess cash to shareholders, improve financial ratios like earnings per share (EPS), signal management’s confidence in the company’s prospects, provide tax-efficient returns compared to dividends, and support the stock price. Buybacks demonstrate that the company believes its shares are undervalued.

3. How does a tender offer buyback work?

In a tender offer buyback, the company announces a fixed buyback price (usually at a premium) and invites shareholders to tender their shares. Investors submit their shares voluntarily, and the company accepts them based on each shareholder’s entitlement and the final acceptance ratio. Not all tendered shares may be accepted if the offer is oversubscribed.

4. Are open-market buybacks still allowed in India?

No. The Securities and Exchange Board of India (SEBI) banned open-market buybacks effective April 1, 2025. Companies must now use the tender offer route for share repurchases, which provides more transparency and equal opportunity to all shareholders.

5. How are buybacks taxed after October 1, 2024?

Following the October 1, 2024 tax changes, shareholders are now responsible for paying tax on buyback proceeds. The buyback amount is treated as deemed dividend income in the hands of shareholders and taxed according to their applicable income tax slab rates, shifting the tax burden from companies to investors.

6. What happens to the cost of tendered shares for tax purposes?

When you tender shares in a buyback, the original cost of acquisition of those shares becomes a capital loss. This loss can be used to offset capital gains from other investments or can be carried forward for up to 8 years to set off against future capital gains, providing tax planning opportunities.

7. Are all tendered shares accepted in a buyback?

No, not all tendered shares are necessarily accepted. Acceptance depends on your entitlement (based on your shareholding) and the final acceptance ratio determined by the company. If the buyback is oversubscribed, the company may accept shares on a proportionate basis, and unaccepted shares are returned to your demat account.

8. When and how do I receive buyback proceeds?

The buyback amount is credited on the settlement date directly to your primary bank account linked to your demat account. The payment is processed through electronic transfer, ensuring quick and secure receipt of funds. You should receive the proceeds within the timeline specified in the buyback offer document.

9. What happens if the credit to my bank account fails?

If the credit to your primary bank account fails for any reason (such as incorrect bank details, account closure, or technical issues), the company will credit the buyback amount to your trading account within 4 working days from the settlement date. You can then transfer the funds to your bank account or use them for trading.

10. How can I participate in a buyback offer?

To participate, you must hold shares in your demat account before the record date. During the tender period, you need to submit your application through your broker or depository participant, specifying the number of shares you wish to tender. Ensure your demat and bank details are updated to avoid payment issues. Follow the detailed instructions provided in the company’s buyback offer document.

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