Buyback
A share buyback (or share repurchase) is a corporate action where a company uses its own funds to repurchase its equity shares from the open market or through a tender offer, reducing the total shares outstanding.
When a company buys back its own shares, those shares are either extinguished (reducing the paid-up capital) or held as treasury stock. The immediate effects are a reduction in shares outstanding, an increase in EPS (since the same earnings are now divided among fewer shares), and often an uptick in ROE (as equity is reduced). Buybacks are widely regarded as a signal that management believes the stock is undervalued.
Indian IT companies became significant users of the buyback mechanism from around 2017 onward. TCS, Infosys, HCL Tech, and Wipro collectively bought back tens of thousands of crores worth of shares over the 2017–2023 period, returning surplus cash to shareholders in a tax-efficient manner. Prior to 2019, buybacks through the tender offer route were taxed at 20% buyback tax in the company's hands (introduced via Finance Act 2013 amendment), which was more favourable for shareholders than receiving dividends taxed at marginal rates. The Finance Act 2024 subsequently changed the tax treatment, making buybacks more costly for companies.
There are two primary routes for buybacks in India: the tender offer route (open to all shareholders at a fixed price for a limited period) and the open market route (company buys shares through the stock exchange over an extended period within a price cap). SEBI regulates both, setting limits on the maximum buyback size (currently up to 25% of net worth in a year) and minimum utilisation of the announced buyback amount.
A key caveat for retail investors: not all buybacks represent genuine management conviction. Some companies announce buybacks primarily for the signalling effect — to create positive market sentiment — without fully following through. SEBI data has shown instances where announced buyback amounts were substantially under-utilised. Tracking actual buyback quantities against the announced maximum is important for assessing management credibility.
Buybacks can also be a tool to manage EPS optically, particularly when used alongside ESOP dilution. A company that issues significant ESOPs (which dilute EPS) and then buys back shares to neutralise the dilution is essentially transferring value from public shareholders to employees — a dynamic worth scrutinising when reading buyback announcements.