Buyback of shares
A company buying back its own shares, under SEBI rules that changed again in 2026.
A buyback is when a company purchases its own shares from shareholders and cancels them. The share count falls, so each remaining share represents a slightly bigger slice of the company. Companies use it to return surplus cash, signal that they think the shares are undervalued, or improve per share ratios such as earnings per share.
For a listed company, the SEBI (Buy-back of Securities) Regulations, 2018 decide how a buyback is done, how big it can be and how fast it must be finished. A SEBI-registered merchant banker manages the process, which is why the topic sits in Chapter 8 of the Series IX syllabus.
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The two routes in force in 2026
Regulation 4(iv), as amended up to July 6, 2026.
Tender offer
How it works
The company offers to buy a fixed number of shares at a fixed price from all shareholders in proportion to their holding (the entitlement ratio). 15% is reserved for small shareholders.
Status
Available
Open market through the stock exchange
How it works
The company buys shares on the exchange over a period, at market prices, up to a maximum price.
Status
Not allowed from April 1, 2025 to July 31, 2026. Allowed again from August 1, 2026, only if less than 15% of paid-up capital and free reserves.
Open market through book building
How it works
Shareholders bid to sell; the price is discovered through a book.
Status
Available as a method under Regulation 4(iv)
| Route | How it works | Status |
|---|---|---|
| Tender offer | The company offers to buy a fixed number of shares at a fixed price from all shareholders in proportion to their holding (the entitlement ratio). 15% is reserved for small shareholders. | Available |
| Open market through the stock exchange | The company buys shares on the exchange over a period, at market prices, up to a maximum price. | Not allowed from April 1, 2025 to July 31, 2026. Allowed again from August 1, 2026, only if less than 15% of paid-up capital and free reserves. |
| Open market through book building | Shareholders bid to sell; the price is discovered through a book. | Available as a method under Regulation 4(iv) |
Older notes are out of date here
Many study notes say the open market route via the stock exchange was 'phased out' from April 2025. That was true until July 31, 2026. A July 2026 amendment brought it back from August 1, 2026, with a cap of less than 15% of paid-up capital and free reserves, an offer that opens within four working days of the public announcement and closes within 66 working days.
The limits a merchant banker checks
- check_circleSize: at most 25% of paid-up capital and free reserves, on the standalone or consolidated accounts, whichever gives the lower figure. For equity shares, the 25% is also read against total paid-up equity capital in that financial year.
- check_circleApproval: a board resolution is enough up to 10% of paid-up equity capital and free reserves; above that, a special resolution of shareholders is needed.
- check_circleDebt: total secured and unsecured debt after the buyback must be at most twice paid-up capital and free reserves.
- check_circleOnly fully paid shares can be bought back.
- check_circleFunding: free reserves, the securities premium account, or proceeds of an issue of a different kind of security. Never the proceeds of an earlier issue of the same kind.
- check_circleNo buyback through subsidiaries or investment companies, no negotiated or private deals, and no buyback that leads to delisting or breaches minimum public shareholding.
- check_circleTimeline: completed within one year of the resolution. The gap before the next buyback is whatever the Companies Act, 2013 prescribes.
- check_circleIn an open market buyback, at least 75% of the amount earmarked must be used, and at least 40% within the first half of the buyback period.
Free account, this exam preselected.
A tender offer in rupees
Illustrative numbers. A company with 10 crore shares buys back 50 lakh shares (5%) at ₹1,200 when the market price is ₹1,000. Ravi holds 200 shares worth ₹2,00,000, so he is a small shareholder (holding up to ₹2 lakh on the record date).
| Step | What happens |
|---|---|
| Small shareholder reservation | 15% of the 50 lakh shares, or the number small shareholders are entitled to by holding, whichever is higher, is set aside for them |
| Ravi's entitlement | Depends on the entitlement ratio for his category; say it works out to 1 share for every 8 held, so 25 shares |
| He tenders 200 shares | He gets ₹1,200 for at least his 25 entitled shares; extra shares are accepted only if others tender less |
| Shares not accepted | Returned to his demat account |
How buyback proceeds are taxed now
The tax rule has changed twice in two years. From October 1, 2024 to March 31, 2026, money received on a buyback was taxed in the shareholder's hands as dividend, and the cost of the shares became a separate capital loss.
The Finance Act, 2026 moved it back to capital gains from April 1, 2026, applying to the tax year 2026-27 onwards (section 69 of the Income-tax Act, 2025). The shareholder now pays capital gains tax on the difference between the buyback price and the cost of the shares, short term or long term depending on the holding period. Promoters pay an additional tax so that their effective rate is 30%, or 22% where the promoter is a domestic company. Check the current rates with a tax professional before acting on them.
How Series IX tests this
Expect limit questions (25% overall, 10% for a board-only approval, 2:1 debt), a 'which is NOT permitted' question (negotiated deals, buyback through a subsidiary, buyback to delist), and the small shareholder definition: market value up to ₹2 lakh on the record date, not the purchase cost.
The trap is mixing up the two 15% figures. Tender offers reserve 15% for small shareholders. Open market buybacks through the exchange must be less than 15% of paid-up capital and free reserves.
FAQs
What is a buyback of shares?expand_more
A company purchasing its own shares from existing shareholders, usually at a premium to the market price, and then cancelling them. It is a way to return cash to shareholders.
Is open market buyback allowed in India now?expand_more
Yes, again. It was not allowed through the stock exchange from April 1, 2025 to July 31, 2026. From August 1, 2026, the SEBI Buy-back Regulations permit it if the buyback is less than 15% of paid-up capital and free reserves.
Who is a small shareholder in a buyback?expand_more
A shareholder whose shares are worth not more than ₹2 lakh at the closing price on the record date, on the exchange with the highest trading volume. 15% of a tender offer is reserved for this group.
How is buyback income taxed from April 2026?expand_more
Under the Finance Act, 2026, as capital gains in the shareholder's hands from April 1, 2026, instead of as dividend. Promoters face an additional tax that brings their effective rate to 30% (22% where the promoter is a domestic company).
How much can a company buy back?expand_more
Up to 25% of its paid-up capital and free reserves. Up to 10% needs only board approval; above 10% needs a special resolution of shareholders.
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