What is a buyback: the mirror image of an IPO

A buyback is a company using its own cash to buy its own shares back from its shareholders, then cancelling them. It is the mirror image of an IPO: instead of raising capital by selling new shares to the public, the company returns capital by buying existing shares back. The share count shrinks, and each remaining shareholder owns a larger slice of the same company.

Take a company that raised ₹100 crore in its IPO five years ago and now sits on more cash than it needs for operations and planned investments. It decides to buy back some of its shares. The shareholders who sell get cash; the ones who hold on now own a bigger percentage of the company without having spent a rupee. The company’s share capital is smaller, but the remaining shares carry a larger claim on its profits and assets.

This is not a casual market transaction. SEBI’s Buy-Back of Securities Regulations, 2018 govern the whole process. They define a “tender offer” as an offer by a company to buy back its own shares through a letter of offer from existing holders. ¹ A buyback is a regulated corporate action, not a simple purchase on the exchange.

Two ways to buy back

A company must buy back its shares by one of two methods, and pick only one per buyback. ¹

The tender offer. The company issues a letter of offer inviting shareholders to sell a number of shares at a fixed price, on a proportionate basis. If too many shareholders tender — the buyback is oversubscribed — the company buys from each on the same proportionate basis, so everyone who tendered sells the same fraction of what they offered. Equal treatment is built in.

The open-market route. The company buys its own shares on the stock exchange, like any other investor. But it cannot buy without limit: SEBI caps how much can be bought through the stock-exchange route, and those caps have been phased down over time. ¹ The point is to stop the company from distorting its own market price by buying too aggressively.

Aspect	Tender offer	Open market
How it works	Letter of offer to all holders at a fixed price, proportionate	Buying on the exchange like any investor
Pricing	Fixed price, set in advance	Market price at the time of purchase
Fairness	Every holder can participate proportionately	Only those who sell on the exchange take part
Volume	Within the overall 25% cap (below)	Within the 25% cap, and a further, lower sub-limit

The 25% cap and the debt guardrail

A buyback cannot be unlimited. Two financial limits work together.

The 25% cap. A company cannot buy back more than 25% of the aggregate of its paid-up capital and free reserves, calculated on the lower of its standalone or consolidated financial statements. ¹ If the standalone numbers give the lower figure, that is the one that counts.

The debt guardrail. After the buyback, the company’s total debt — secured and unsecured combined — must be no more than twice its paid-up capital and free reserves: a 2:1 ratio. ¹ This stops a company from loading up on debt to fund a buyback; a company already carrying high debt may not be able to buy back at all, because the post-buyback ratio would breach 2:1. The one exception: if the Companies Act, 2013 has notified a higher ratio for a class of companies, that higher ratio prevails. ¹

Only fully paid-up shares can be bought back — a company cannot buy back shares the holder has not fully paid for. ¹

Where the money comes from

A company cannot use just any cash on hand. The regulation specifies the permitted sources: ¹

• Free reserves — retained earnings accumulated over time and not paid out as dividends.
• The securities premium account — money collected above the face value of shares in earlier issues. Shares issued at ₹100 on a ₹10 face value put ₹90 of premium into this account.
• The proceeds of a fresh share issue — money raised by issuing new shares for the purpose.

With one restriction: a buyback cannot be funded out of the proceeds of an earlier issue of the same kind of shares. ¹ A company cannot raise money by issuing equity and then turn around and use that same money to buy equity back — which would simply undo the issue it just made.

Cancelling the shares, and the anti-avoidance rules

The company does not get to keep the shares it buys back. They must be extinguished and physically destroyed within seven working days after the buyback period ends, and the buyback is not permitted unless the consequent reduction of share capital is actually effected. ¹ The capital is genuinely reduced, not parked — the balance sheet shrinks, and the remaining shares carry a larger claim on the company’s assets and earnings.

SEBI also bars indirect buybacks. A company cannot buy its own shares through a subsidiary, or through any investment company or group of investment companies. ¹ The rule stops a company from sidestepping the limits and disclosures by routing the purchase through a related entity.

The whole buyback must be completed within one year of the board or shareholder approval. ¹

Footnotes

1. SEBI (Buy-Back of Securities) Regulations, 2018, last amended on 28 November 2024. sebi.gov.in. Citations are to Regulation 4 (conditions and limits), Regulation 11 (extinguishment), and the definition of “tender offer”. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹ ↩¹⁰ ↩¹¹ ↩¹²