6A.4 Buybacks · M06A Events, sectors, factors

Motivation

A buyback returns cash by purchasing shares. Indian IT companies have used them repeatedly. Three questions decide whether one helps a continuing shareholder: does it raise EPS, does it transfer value between tendering and remaining holders, and what does the tax system do to each.

6A.4.1Limits and routes#

Setup: the rules in Indiachecked 6 Nov 2026

Companies Act 2013, s.68. A buyback is limited to 25% of paid-up capital plus free reserves (equity buybacks also to 25% of paid-up equity capital in a year); up to 10% needs only board approval, beyond that a shareholders' special resolution. Post-buyback debt may not exceed twice paid-up capital plus free reserves (with exceptions notified for some sectors).
SEBI (Buy-back of Securities) Regulations 2018. Two routes historically: a tender offer (a fixed price, proportionate acceptance, with 15% reserved for small shareholders, those holding shares worth at most ₹2 lakh on the record date) and an open-market purchase through the exchange or by book building. The SEBI amendments of 2023 phased out open-market purchases through the exchange from 1 April 2025¹; tender offers have been the main route since. A SEBI consultation paper of April 2026 reportedly proposes reintroducing the exchange route²; check sebi.gov.in for the outcome.
The acceptance ratio. In a tender offer, each holder has an entitlement (shares the company is bound to accept) computed from record-date holdings. If others do not tender their entitlement, those who tender extra get more. Ratios are reported after the offer closes.

6A.4.2Tax on buybacks#

Tax: three regimes for an Indian resident individual (statutes are being renumbered under the Income-tax Act 2025; section numbers below are those of the 1961 Act):

Period of buyback	Company	Shareholder
Up to 30 Sep 2024	Pays buyback tax (s.115QA) of 20% plus surcharge and cess on the amount distributed above the issue price	Proceeds exempt (s.10(34A))
1 Oct 2024 – 31 Mar 2026	No buyback tax	Entire proceeds taxed as deemed dividend at slab rates; cost of the shares bought back becomes a capital loss usable only against capital gains [V/S: Finance (No. 2) Act 2024; mondaq, taxguru]
From 1 Apr 2026	No buyback tax	Capital gains on proceeds minus cost (listed: STCG 20%, LTCG 12.5% above the exemption); promoters pay an additional tax designed to bring their effective rate to about 22% (corporate promoters) or 30% (others)³

The 2026 change was reported as passed with amendments (including a 12% surcharge on the promoter additional tax) in March 2026; this course has not checked the gazetted Finance Act 2026 text. Verify before computing a real tax bill.

6A.4.3EPS accretion#

Proposition 6A.5EPS accretion

A company with earnings $E$ , $N$ shares, and cash earning pre-tax yield $r$ at tax rate $\tau$ spends $C$ buying back shares at price $P_b$ . Then post-buyback EPS is

\text{EPS}' = \frac{E - r(1-\tau)C}{N - C/P_b}, \tag{6A.5}

and $\text{EPS}' > E/N$ if and only if

\frac{E/N}{P_b} > r(1 - \tau): \tag{6A.6}

the earnings yield at the buyback price exceeds the after-tax yield on the cash spent.

Proof

$\text{EPS}' > E/N \iff N[E - r(1-\tau)C] > E(N - C/P_b) \iff -N r(1-\tau)C > -EC/P_b \iff E/(NP_b) > r(1-\tau)$ , dividing by $NC > 0$ .∎

Accretion says nothing about value. A company at P/E 40 buying back with cash earning 7% pre-tax ( $r(1-\tau) \approx 5.2\%$ at a 25.17% tax rate) dilutes EPS, because its earnings yield is 2.5%; a company at P/E 10 accretes. Neither fact tells you whether the buyback created value.

6A.4.4Value transfer and signalling#

Proposition 6A.6value transfer

Let $V$ be the intrinsic value of the equity before the buyback (including the cash). After spending $C$ at $P_b$ , intrinsic value per remaining share is

v' = \frac{V - C}{N - C/P_b}, \tag{6A.7}

and $v' > V/N$ if and only if $P_b < V/N$ .

Proof

$v' > V/N \iff N(V - C) > V(N - C/P_b) \iff -NC > -VC/P_b \iff P_b < V/N$ .∎

Buying back below intrinsic value transfers value from tendering to remaining shareholders; above it, the reverse. In a tender offer at a premium to market, if the market price is near intrinsic value, the premium is a transfer to whoever tenders, and the acceptance ratio decides how it is shared. Signalling explains why buyback announcements raise prices: managers who know $V/N$ and buy at $P_b$ reveal their belief that $P_b < V/N$ (Vermaelen 1981). Ikenberry, Lakonishok and Vermaelen (1995) found positive long-run abnormal returns after US open-market buyback announcements, largest for high book-to-market firms.

Worked example

A company has PAT ₹5,000 cr, 400 cr shares, price ₹250 (P/E 20), and cash earning 7% pre-tax. It buys back ₹4,000 cr at ₹300 by tender: 13.33 cr shares. Lost after-tax interest is $4{,}000 \times 0.07 \times 0.7483 = \text{₹}209.5$ cr. EPS goes from ₹12.50 to $4{,}790.5/386.67 = \text{₹}12.39$ , a 0.9% dilution. By (6A.6), accretion needed $P_b < 12.50/0.0524 = \text{₹}238.6$ . If an analyst's intrinsic value is ₹280 a share, (6A.7) gives $(112{,}000 - 4{,}000)/386.67 = \text{₹}279.3$ for remaining holders: the 20% premium transferred about ₹0.7 a share from those who stayed to those who tendered.

Practitioner notes

Tender-offer "arbitrage": buy before the record date, tender, sell the unaccepted shares after. The payoff depends on the acceptance ratio (uncertain until the end), the price drop after the offer, and tax. Under the deemed-dividend regime of October 2024 to March 2026 the trade was usually loss-making for a high-slab individual unless they had capital gains to absorb the capital loss (Problem 6A.6). Under the April 2026 regime it is taxed as a short-term capital gain.
Reported retail acceptance ratios have fallen as more investors play the trade. In the TCS tender of December 2023 (₹17,000 cr at ₹4,150), the small-shareholder entitlement was 1 share for every 6 held, and press reports put the realised small-shareholder acceptance at roughly 28–35%⁴. See 6A.13.1.