Cash out, shares cancelled
Suppose Bharat Foods decides it has more cash than its business needs, and offers to buy back 5 lakh of its own shares at ₹600 — ₹100 above the ₹500 market price. That is ₹30 crore leaving the company.
The shares it buys are not kept. They are extinguished: cancelled, so that 1 crore shares in issue become 95 lakh. Every remaining share is now a slightly larger slice of a company that holds ₹30 crore less.
A (01.07.01) also sends cash to shareholders, but to every holder in proportion. A buyback pays only the holders who sell, and changes the slices of those who do not. That difference is the whole lesson.
Who gains depends on the price
The hypothetical Bharat Foods buyback of 5 lakh shares. You offer all ten of yours, and one is accepted — the next section shows why only one. Tap each price.
All else equal assumes ₹500 was a fair price for everything Bharat Foods owns, including the cash it spends. Real prices also react to what a buyback appears to say about the business.
The premium is paid by the holders who stay
At ₹600, sellers receive ₹5 crore more than the shares were worth at the market price. That money is company cash — and company cash belonged to every shareholder, including the ones who did not sell. All else equal, each remaining share falls from ₹500 to ₹494.74.
Turn it around and a buyback below what the shares are worth moves value the other way, from the sellers to the holders who stay. That is why a buyback is often described as a vote of confidence: a board that believes its shares are cheap is, in effect, buying for the remaining owners at a discount. Whether the board is right is a question for Part 15, not something the announcement proves.
So the premium is not money from nowhere. It is a transfer between two groups of the same company's owners.
Route one: the tender offer
In a tender offer, the company fixes a price and a number of shares, sets a , and invites everyone on the register to offer their shares, through their broker, during a short window. Each holder has an entitlement: the number of their shares the company is committed to accept if they tender.
Entitlements are proportionate, with one tilt in favour of small holders. 15% of the shares being bought back are reserved for small shareholders — those whose holding is worth no more than ₹2 lakh on the record date. Your ten Bharat Foods shares, worth ₹5,000, put you in that group.
Suppose small shareholders together hold 7.5 lakh shares on the record date. Their reserved 75,000 shares are one tenth of that, so your entitlement is 1 share in every 10. Tender all ten and one is certain to be accepted; more may be, if other holders tender less than their entitlement. Whatever is not accepted comes back to your demat account.
- Shares reserved for small shareholders
- 15% of 5 lakh = 75,000
- Held by small shareholders on the record date
- 7.5 lakh (assumed)
- Your entitlement
- 1 share in every 10
- Paid for your accepted share
- ₹600 against ₹500 on the exchange
A company reserves 30,000 shares in its buyback for small shareholders, who hold 3,00,000 shares on the record date. You hold 50 and tender them all. Drag to your entitlement.
Route two: the open market
In an open-market buyback through the stock exchange, the company does not write to anyone. It places orders on the exchange, like any other buyer, up to a maximum price it has announced, over a set period. SEBI stopped this route from 1 April 2025, because a few sellers could capture most of a buyback and because of how it was then taxed. It was brought back from 1 August 2026, with conditions.
Under the 2026 rules, such a buyback must be less than 15% of the company's paid-up capital and free reserves, must be completed within 66 working days, and must spend at least 40% of the money set aside in the first half of that period. Promoters cannot sell into it, and their shares are frozen while it runs.
From your side, the difference is simple. In a tender offer you know the price and your entitlement. In an open-market buyback you only know that one more buyer is in the — and your sale may or may not be to the company. There is also a rarely used third route, book building, where holders bid the price at which they will sell.
During Bharat Foods' open-market buyback, you sell ten shares on the exchange at ₹520. Who bought them?
The limits, and a floor you have met
Company law caps the size. A board can approve a buyback of up to 10% of paid-up capital and free reserves on its own; up to 25% needs a special resolution of shareholders. Afterwards the company's debt must be no more than twice its paid-up capital and free reserves, and it cannot make another buyback offer within a year. Whether ₹30 crore fits for Bharat Foods depends on its free reserves, which this book has not stated — the example assumes it does.
There is a second limit hiding in the shareholding. Bharat Foods' public shareholders hold exactly 25% (01.03.02), the usual minimum. If all 5 lakh shares came from public holders, the public would own 20 lakh of 95 lakh — 21.05%, below the floor. If the promoters sold in proportion, the public would stay at 25%. Who sells into a buyback can matter as much as how much is bought.
For buybacks from 1 April 2026, what an ordinary shareholder receives is taxed as a capital gain — tax on the gain over what you paid, not on the whole amount. Between October 2024 and March 2026 it was taxed as dividend income instead, and promoters now face an additional tax of their own. The rates, and what they mean for your decision, are chapter 01.09. Check the rules in force on the date of any offer.
Dividends, bonuses, splits, rights issues and buybacks each change the shares behind a price. The last lesson in this chapter is about what they do to the price history you look at — and why a chart can show a crash that never happened.