What is a Share Buyback?

A share buyback (also called a share repurchase) occurs when a company purchases its own equity from existing shareholders or from the open market. The effect: the number of outstanding shares falls which usually raises per-share metrics (EPS, sometimes ROE). Buybacks are a capital-allocation decision — management chooses the buyback route when it believes either (a) the stock is undervalued, (b) there are no attractive growth investments, or (c) returning cash to shareholders is a priority.

Concise example

Imagine a company with 100 shares and ₹100,000 in profits → EPS = ₹1,000. If the company buys back 20 shares and cancels them, outstanding shares fall to 80 and EPS becomes ₹1,250 — a 25% increase. That arithmetic helps explain why buybacks often lift reported EPS even if total profits don’t change.

Why Companies Buy Back Shares

Buybacks are chosen for several strategic reasons. Below are the most common drivers and the rationale behind each:

• Return surplus cash: When a company has limited high-return investment options, returning cash via buybacks is a disciplined alternative to hoarding cash.
• Signal undervaluation: Management may signal conviction in the business by repurchasing stock it considers undervalued.
• Improve capital ratios: By reducing equity, measures like earnings per share (EPS) and return on equity (ROE) often improve.
• Defend against takeovers: Reducing float can help deter hostile bids or consolidate promoter holdings.
• Tax efficiency: In some jurisdictions and for certain shareholder profiles, buybacks can be more tax-efficient than dividends.

When buybacks might not be wise

• If the stock is overvalued — buybacks can be value-destructive.
• If the company needs cash for R&D, capex, or strategic M&A.
• If the buyback excessively leverages the balance sheet and raises financial risk.

Buyback Mechanics & Methods

Broadly, buybacks are executed in two primary ways — and there are variations within these methods:

Tender Offer (or Fixed Price)

A tender offer invites shareholders to sell at a fixed price (typically at a premium to the market). If more shares are tendered than the company intends to buy, there is a pro-rata acceptance (acceptance ratio). Example: Company offers to buy 10 crore shares at ₹1,150 — if shareholders tender 20 crore, expected acceptance ratio is 50%.

Open Market Buyback

The company buys shares over the stock exchange like any other buyer, following daily limits and disclosure rules. Open market buybacks are flexible but may take longer and are subject to price fluctuations.

Odd-lot/Book-building/Spot

SEBI and other regulators allow for odd-lot offers (for small holders) and book-building methods for pricing buybacks in some scenarios.

Legal & Regulatory Framework (India)

In India, buybacks are regulated by the Companies Act, 2013 and SEBI Buyback Regulations. Major rules include:

• Maximum limit: A company can buy back up to 25% of paid-up equity + free reserves in a financial year (subject to conditions).
• Approval: Board consent is needed up to certain limits; >10% of equity normally requires shareholder approval via special resolution.
• Mode: Open market, tender offer, or odd-lot methods as prescribed.
• Disclosure: Corporate announcements, escrow, and procedural transparency are mandatory.

Infosys Case Study (2017–2025): Timeline, Rationale & Lessons

Infosys, one of India’s largest IT services firms, provides an excellent real-world example of recurring buybacks used as a strategic capital-allocation tool. Below we analyze the main buyback events, their context, and what investors learned.

High-level timeline & data (condensed)

*Data as of Sep 2025 proposals and public announcements.

Why Infosys used buybacks repeatedly

• Strong cash generation: The company consistently generated free cash flow exceeding internal reinvestment needs.
• Market signaling: After periods of management uncertainty or sectoral weakness, buybacks were an effective confidence-building tool.
• Balanced approach: Infosys combined buybacks with dividends to keep both long-term and income investors satisfied.

Investor impact & acceptance behavior — practical notes

Tender offers typically provide an immediate exit opportunity for shareholders who participate, often at a premium to prevailing market prices. Open market buybacks, on the other hand, gradually reduce float and support price, benefitting both active participants and passive holders.

Lessons from the Infosys story

1. Consistency matters: Repeated buybacks shape investor expectations and can stabilize valuations.
2. Not a substitute for growth: Buybacks are a way to return cash when attractive growth options are limited.
3. Governance & transparency: Clear disclosures around buyback size, method and timelines maintain shareholder trust.

Impact on Financials & Shareholders

Buybacks affect several financial metrics. Below are the main impacts and how investors should think about them:

• EPS improvement: Because the denominator (shares outstanding) falls, EPS typically increases — which may be positive for valuation multiples if earnings are stable.
• ROE & leverage: Equity base reduction can boost ROE but may increase leverage if funded through debt.
• Immediate liquidity for participants: Tender offers give participating shareholders cash at the buyback price.
• Market sentiment: Announcements often produce short-term price pops as the buyback signals confidence.

Potential pitfalls

• If buybacks are financed by unsustainable borrowing, risk rises.
• When a company repurchases at high prices, it may destroy long-term shareholder value.

Investor Strategies & Practical Examples

Below are practical investor approaches when a company announces a buyback.

1) Participate in tender offers (short-term liquidity)

Retail investors who want immediate cash at a premium may tender shares. Key considerations: acceptance ratio estimate, tax consequences, and opportunity cost (if remaining shares rise after buyback, a tendered shareholder misses further upside).

2) Hold & benefit from EPS uplift (long-term)

If you believe the company’s fundamentals remain strong, holding can be attractive — you benefit from higher EPS, potential price uplift and continued dividend streams.

3) Arbitrage for active traders

Traders may buy shares pre-announcement and sell during tender period aiming to capture premium. This is risky and requires careful timing and cost calculation.

Worked example — retail investor

Suppose you own 1,000 Infosys shares at market ₹1,600. Company announces a tender at ₹1,850 with expected acceptance ratio 70%. If you tender all:

• Accepted shares = 700 → cash = 700 × 1,850 = ₹12,95,000
• Unaccepted shares = 300 → remain at market price (assume no immediate change) = 300 × 1,600 = ₹4,80,000
• Total value after acceptance = ₹17,75,000 vs pre-announcement market value = 1,000 × 1,600 = ₹16,00,000
• Net gain = ₹1,75,000 (≈10.94% uplift overall) — plus you’ve converted part of holdings into cash at a premium.

This example is simplified and ignores taxes and transaction costs, which you should always include.

Buyback vs Dividend vs Bonus vs Rights

Interactive Buyback Calculator — Works 100%

Use this calculator to model tender and open market scenarios. Brief input tips:

• If you are unsure about acceptance ratio (for tender route), use known estimates or check company’s official notice.
• Refresh page to reset inputs and results anytime.

Calculator: Example Interpretations

Try these examples in the calculator:

1. Own 1,000 shares; tender 700; buyback price ₹1,850; market ₹1,600; acceptance ratio 70% → accepted ~490 shares and immediate cash premium.
2. Own 2,000; tender all 2,000; acceptance 60% → accepted 1,200 shares; evaluate cash and remaining shares.
3. Open market: sell 500 shares at ₹1,650; estimate realized cash after commissions.

FAQs — Practical Answers

Q: Do buybacks always push stock prices up?

A: Not always. Announcements often lead to short-term positive sentiment, but long-term price movement depends on fundamentals and whether the buyback was value-creating.

Q: Should I always participate in tender offers?

A: It depends on your investment objective. If you want immediate liquidity at a premium and accept pro-rata acceptance risk, participate. If you want to maximize long-term exposure, consider holding.

Q: How is acceptance ratio calculated?

A: If the total tendered shares exceed the company’s intended purchase size, the acceptance ratio is (shares company will buy / total tendered shares) × 100%. The company announces the final acceptance ratio in the acceptance notice.

Q: What about buyback tax?

A: Jurisdictions vary. In India, post-2019 rules changed buyback tax treatment — companies may pay tax on buyback. Personal capital gains rules may or may not apply depending on route and local law. Always check the company notice and consult a tax expert for your situation.

Conclusion — How to Use This Guide & Calculator

Buybacks are a powerful capital-allocation tool. They can reward investors, manage capital structure and signal management confidence — but they are not a universal good. Read company disclosures carefully, understand the buyback route (tender vs open market), model expected acceptance ratios and commissions using the calculator above, and factor in your investment horizon and tax position before deciding.

The Infosys case (2017–2025) highlights how repeat buybacks can form part of a company’s long-term capital-return policy. For investors, the key is to combine quantitative modeling (use the calculator) with qualitative judgement: is the buyback improving long-term shareholder value or simply manipulating short-term metrics?

Written by CMA Knowledge | © cmaknowledge.in | September 2025