Buyback of Shares in India: Tender Offer vs Open Market Route, and What Each One Signals

A buyback of shares is the one corporate action where the company itself turns up as a buyer of its own stock. It takes cash off the balance sheet, pays it to whoever sells, and cancels the shares it gets back. Simple enough on paper. In India, though, how a company buys back matters almost as much as whether it does, and the rules changed again this year when SEBI brought back the open market route through the stock exchange from August 1, 2026.

This piece walks through both routes, the limits that apply, and a worked example on a made-up company so you can see what a buyback does to EPS, to your entitlement and to promoter holding. Then we look at what the announcement is really telling you.

How a buyback of shares works in India

Listed companies follow the SEBI (Buy-Back of Securities) Regulations, 2018, and unlisted ones follow the Companies Act. SEBI’s investor education page on buybacks sets out the basic guardrails:

• A company cannot buy back more than 25% of its paid-up capital and free reserves.
• The buyback has to be allowed by the company’s Articles of Association.
• Below 10%, board approval is enough. Above that, shareholders must pass a special resolution.
• The company has to make a public announcement, and the buyback must be finished within a year of approval.
• Shares bought back are extinguished. They are cancelled and cannot be reissued.

That last point is the whole mechanism. Fewer shares exist after the buyback, so each remaining share owns a slightly bigger slice of the same business. Whether that slice is worth more depends on the price the company paid, which is where most investors stop thinking too early.

SEBI’s page lists the usual reasons companies give: lifting earnings per share, using surplus cash instead of paying a dividend, defending against a hostile takeover, and raising the promoter’s stake. Keep that last one in mind. It comes up again in the example.

Route one: the tender offer

In a tender offer, the company fixes a price, usually above the market, and invites existing shareholders to offer their shares. Everyone holding shares on the record date gets an entitlement, and acceptances are proportionate. SEBI’s investor page says 15% of the offer is reserved for small shareholders, meaning those whose holding is worth up to ₹2 lakh.

You tender through your broker during the offer window. Not everything you tender will necessarily be accepted, and unaccepted shares come back to your demat account. SEBI’s page says accepted shares are debited and payment is credited within 5 working days.

For a retail holder, the tender route is the friendlier one. You know the price in advance, the small-shareholder reservation tilts the maths in your favour, and you can work out roughly how many shares will be taken before you decide.

Route two: the open market, and why it disappeared for a while

In an open market buyback, the company doesn’t announce a fixed price to everyone. It buys over a period, either through a book-building process or by placing orders on the stock exchange like any other buyer. The exchange route is the one that has had a rough few years.

SEBI’s investor page notes that the stock exchange method was phased out and not allowed after April 1, 2025.

Then it came back. At its board meeting on June 19, 2026, SEBI approved bringing open market buybacks through the exchange back from August 1, 2026, and said it was doing so considering the revised taxation framework applicable for buy-backs. The SEBI board meeting press release sets out the main conditions:

• The buyback has to be completed within 66 working days from the day it opens.
• At least 40% of the money earmarked has to be used in the first half of that period, so a company can’t announce a big number and then barely buy.
• Promoters can’t take part, and shares held by promoters and their associates stay frozen at the ISIN level during the buyback period.
• The separate trading window and the display of the company’s identity as buyer on the trading screen are gone. These buybacks are now treated as normal trades.
• Buybacks must keep the company within minimum public shareholding rules.
• Appointing a merchant banker is now the company’s choice rather than compulsory.

The amended regulations SEBI notified on July 1, 2026 add two more details: from August 1, 2026, an exchange-route buyback has to be less than 15% of paid-up capital and free reserves, and the offer must open within four working days of the public announcement and close within 66 working days. You can read the full text in the SEBI Buy-Back (Amendment) Regulations, 2026 notification.

A tender offer tells you the price up front. An open market buyback tells you the budget and leaves the price to the market, which is a very different promise.

A worked example: Sabari Pumps Ltd

Sabari Pumps Ltd is hypothetical. Every number below is made up to show the mechanics, not taken from any real company.

Start with the basics. Sabari Pumps has 10 crore shares and a net profit of ₹200 crore, so EPS is ₹20. The stock trades at ₹400, a P/E of 20. Promoters hold 5 crore shares, or 50%. The company has ₹240 crore of surplus cash sitting in deposits that earn 6% a year before tax, and it pays tax at 25%.

Case A: tender offer at ₹480

The board announces a tender offer for 50 lakh shares (5% of the equity) at ₹480, a 20% premium to the market. Total outgo is 50 lakh × ₹480 = ₹240 crore.

Now the part most people skip. That ₹240 crore was earning interest. At 6%, that’s ₹14.4 crore a year before tax, or ₹10.8 crore after 25% tax. So next year’s profit, all else equal, drops to ₹200 crore − ₹10.8 crore = ₹189.2 crore.

Shares outstanding fall to 9.5 crore. New EPS = ₹189.2 crore ÷ 9.5 crore = about ₹19.92.

EPS went down. Not by much, but down. The reason is simple: at ₹480, the company is paying 24 times its current EPS of ₹20, an earnings yield of about 4.17% (₹20 ÷ ₹480). The cash it gave up was earning 4.5% after tax. When the buyback price implies a lower earnings yield than the cash was making, EPS falls. This is why “buyback boosts EPS” is a claim to check, not assume. If the cash had been idle and earning nothing, EPS would have risen to ₹200 crore ÷ 9.5 crore, or about ₹21.05.

Case B: open market route at around ₹400

Suppose instead the company spends the same ₹240 crore buying on the exchange at an average of ₹400. That buys 60 lakh shares. Shares outstanding fall to 9.4 crore, profit is still ₹189.2 crore after the lost interest, and EPS = ₹189.2 crore ÷ 9.4 crore = about ₹20.13.

Same cash, more shares cancelled, and a small EPS gain instead of a small loss. The earnings yield at ₹400 is 5% (₹20 ÷ ₹400), which beats the 4.5% the cash was earning. Buying cheaper is what made the difference, not the act of buying.

What happens to the promoter’s stake

In Case B, promoters can’t sell into an exchange-route buyback, and their shares are frozen. So all 60 lakh shares come from public holders. Promoters still own 5 crore shares, but now out of 9.4 crore, so their stake rises from 50% to about 53.2% without them buying a single share. In Case A, if the promoters chose not to tender, the stake would rise to 5 crore ÷ 9.5 crore, about 52.6%. This is the “increase promoter holding” reason from SEBI’s list, in practice.

Your entitlement as a small shareholder in Case A

Say small shareholders hold 1.2 crore shares in total on the record date. Their reserved share of the buyback is 15% of 50 lakh = 7.5 lakh shares. Entitlement ratio for the small category = 7.5 lakh ÷ 1.2 crore = 6.25%.

The other 42.5 lakh shares are spread over the remaining 8.8 crore shares, a ratio of roughly 4.83%. So the reservation gives smaller holders a better hit rate.

You hold 400 shares worth ₹1.6 lakh at ₹400, which keeps you inside the ₹2 lakh limit. Your entitlement is 6.25% of 400 = 25 shares. If those are accepted at ₹480, the premium over the market price is 25 × ₹80 = ₹2,000. On a ₹1.6 lakh holding, that’s 1.25%.

Useful, but small. And your other 375 shares are still exposed to the market. If the stock slips 5% to ₹380 after the offer closes, those 375 shares lose ₹7,500 in value, more than three times the premium you picked up. SEBI’s own page lists a price fall after the buyback as a risk for investors. We’d treat a tender premium as a small bonus, not a reason to buy the stock.

The buyback premium is paid on a slice of your holding. The market risk applies to all of it.

What the announcement actually signals

Every buyback press release says roughly the same thing about confidence and rewarding shareholders. The details tell you more. Here’s what we read first.

Size against cash and profit. Compare the buyback amount with the cash on the balance sheet and a year’s profit. A buyback funded from genuine surplus cash is a different animal from one that leans on borrowing. Our guide on how to analyse quarterly results covers where to find the cash flow and debt lines.

The price, not just the premium. A 20% premium sounds generous. Run the earnings yield check from the example. If the company is buying at a P/E far above what its cash earns, it may be supporting the share price more than creating value. Our explainer on EPS meaning, basic vs diluted helps with the per-share maths.

The route. A tender offer commits to a price and a quantity. An exchange-route buyback commits to a budget and a timeline, and the company buys at whatever the market offers. The 40%-in-the-first-half rule makes it harder to announce and then quietly underspend, but the route still gives management more control over pace.

Who gains stake. Since promoters can’t sell into the exchange route, their percentage holding rises automatically. Ask whether that’s a side effect or the point. A creeping promoter stake isn’t bad on its own, but it is worth noticing.

What it replaces. SEBI lists using surplus cash instead of paying dividends as a common reason. Compare with how the company has paid out in the past. Our piece on the dividend payout ratio shows how to judge whether payouts are affordable.

Tax and practical checks before you tender

Buyback tax rules have been revised, and SEBI cited the revised tax framework when it brought the exchange route back. Don’t rely on old articles or forum posts. Read the tax section of the letter of offer and check your own position with a tax professional before you decide to tender.

A few practical points from SEBI’s investor page:

• Only shareholders on the record date are eligible for a tender offer.
• You tender through your broker during the offer period.
• Unaccepted shares are returned to your demat account.
• The letter of offer gives the exact entitlement ratio, the record date and the timeline. Treat it as the final word over any news summary.

The short version

A buyback of shares cancels stock and hands cash to the sellers. In India, a tender offer fixes the price and reserves 15% for small holders, while the exchange route, back from August 1, 2026, lets the company buy at market prices within 66 working days, keeps promoters out, and must stay under 15% of paid-up capital and free reserves. Whether it helps you depends on the price paid against what the cash was earning, not on the headline premium.

Disclaimer: This article is for information and education only and is not investment advice or a recommendation to buy, sell or tender any security. Sabari Pumps Ltd and all share counts, prices, profits, holdings and rates in the worked example are hypothetical. Regulatory details are from SEBI’s investor education page on buybacks, the SEBI board meeting press release of June 19, 2026 and the SEBI (Buy-Back of Securities) (Amendment) Regulations, 2026, all linked above. Consult a SEBI-registered investment adviser and a tax professional before making investment decisions.