SEBI Guidelines on Share Buyback: Key Rules Every Investor Should Know

Share buybacks are corporate actions where companies repurchase their own shares from the existing shareholders. These buybacks can affect share prices, earnings per share (EPS), and overall shareholder value. In India, such actions are regulated by the Securities and Exchange Board of India (SEBI), maintaining transparency and safeguarding investor interests. This article explores the key SEBI rules governing share buybacks, the methods used, and what investors need to know before participating. SEBI regulations limit buybacks to 25% of a company's paid-up capital and free reserves, require a 2:1 debt-to-equity ratio after the buyback, and mandate a Special Resolution for buybacks over 10% of paid-up capital and free reserves. Since April 2025, the tender offer is the only permitted buyback route, replacing the open market method through stock exchanges.

A share buyback, also called a share repurchase, is when a listed company buys back its own shares from the market or shareholders. This results in a reduction of the outstanding shares in the market, which can improve financial ratios like EPS and return on equity (RoE).

Buybacks are typically undertaken when a company has surplus cash and no immediate investment plans or when management believes the share price is undervalued.

The decision to repurchase shares can stem from several strategic or financial motivations:

• Optimise capital structure
  

• Increase shareholder value
  

• Boost key ratios like EPS and RoE
  

• Utilise surplus cash efficiently
  

• Provide an exit route to shareholders
  

• Show confidence in company fundamentals
  

Buybacks also send a positive signal to the market, indicating that the company believes in its future performance.

Below are the common methods used for share buybacks:

Tender Offer

The company offers to buy shares from existing shareholders at a fixed price within a specified time frame. Shareholders can choose to participate partially or fully.

Open Market Purchase

The company buys shares directly from the secondary market over an extended period, usually through stock exchanges.

Buyback from Odd Lot Holders

Offered to shareholders holding odd lots (less than a marketable lot), giving them an opportunity to liquidate small holdings.

Book Building Process

Less commonly used, this method involves price discovery through bids placed by shareholders, typically in large-scale buybacks.

SEBI has laid down specific regulations under the SEBI (Buy-Back of Securities) Regulations, 2018. Below are the core rules:

Buyback Limit

A company may buy back a maximum of 25% of its paid-up equity capital as well as free reserves in a financial year.

Debt-Equity Ratio Post Buyback

The debt-equity ratio after buyback must not exceed 2:1, ensuring the company doesn’t become over-leveraged.

Time Frame

• For open market buybacks: Completion must happen within six months.
  

• For tender offers: Buyback process must be completed within ten working days from the closure of the offer.
  

Cooling-Off Period

There must be a gap of at least one year between two buyback offers by the same company.

Acceptance Ratio

In the case of over-subscription in a tender offer, shares are accepted on a proportionate basis.

Escrow Account Requirement

For tender offer buybacks, companies must deposit a portion of the total buyback amount into an escrow account to ensure fund availability.

Following are some of merchant banker’s functions and responsibilities:

Here's how different types of buybacks are taxed in India:

• For buybacks by listed companies, the company pays a buyback tax as per Section 115QA of the Income Tax Act.
  

• Investors do not pay capital gains tax on shares tendered in such buybacks.
  

• In case of open market buybacks, normal capital gains tax rules apply depending on the holding period.
  

Tax treatment varies, so investors should check the latest provisions or consult a financial advisor for specifics.

Here are some key benefits to consider:

• Reduced Supply: Fewer outstanding shares can increase earnings per share.
  

• Possible Price Appreciation: Buybacks may signal undervaluation, potentially driving prices up.
  

• Opportunity for Exit: Investors looking to sell can tender their shares at a fixed premium.
  

• No Tax on Tendered Shares: For listed buybacks, the buyback tax is borne by the company.

While buybacks can offer several advantages, there are also potential downsides:

Investors should analyse the company's intent and fundamentals before participating.

You can participate by following a few straightforward steps outlined below:

• Monitor company announcements on BSE/NSE for buyback details.
  

• For tender offers, respond through your demat account using the broker platform.
  

• Check the cut-off dates and offer price before applying.
  

• Once accepted, the funds are credited directly to your linked bank account.
  

Participation is voluntary, and shareholders can choose to hold or tender based on their own investment strategy.

Share buybacks can be an effective capital allocation strategy when done within regulatory limits and for the right reasons. SEBI’s guidelines ensure that buybacks occur in a transparent and fair manner, safeguarding shareholder interests. Understanding the rules, processes, and implications can help investors make informed decisions when such opportunities arise.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.