Buyback of Shares in India – A Study

Buyback of Shares

In India, share buybacks are a relatively new concept that has recently gained traction. The SEBI (Buyback of Securities) Regulations 1998 govern the buyback of shares and establish criteria for the process. The SEBI (Buyback of Securities) Regulations, 2018, have just updated the 1998 regulations. A stock buyback is when a business buys back its own stock that was previously issued. It is a corporate move in which a corporation makes a public notice about a buyback offer to acquire existing shareholders’ shares within a specified term. A stock buyback or repurchase of shares is another term for a stock buyback. The corporation announces a buyback offer that is higher than the current market price.

Reasons behind Buyback of Shares

A repurchase is likely to be deemed the wisest use of cash at the time by a company’s management. After all, the purpose of a company’s management is to maximize shareholder returns, and a buyback usually does just that. “We don’t see any greater investment than in ourselves,” says the standard news release for a repurchase. This isn’t always the case, though. There are additional good reasons for firms to buyback stock. For example, management may believe that the market has undervalued its stock too much. The market can punish a stock’s price for a variety of reasons, including weaker-than-expected earnings, an accounting scandal, or simply a terrible overall economic situation. When a corporation spends millions of dollars to buy back its own stock, it can indicate that management believes the market has discounted the stock too much, which is a good indicator.  

Another reason a firm can undertake a repurchase is to enhance its financial ratios, which are the measurements investors use to assess a company’s worth. This is a questionable motivation. There may be a problem with management if cutting the number of shares is done to improve financial ratios rather than to increase shareholder value. Better financial ratios could simply be an outcome of a smart corporate choice if a company’s motivation for commencing a repurchase is legitimate. Let’s take a look at what’s going on.

Another reason a corporation would pursue a buyback is to avoid the dilution that comes with substantial employee stock option plans (ESOP). Bull markets and strong economies frequently result in a labor market that is extremely competitive. Companies must fight to retain employees, and ESOPs are a common component of many compensation packages. When stock options are exercised, they increase the number of shares outstanding, which is the inverse of share repurchases. A change in the number of outstanding shares can alter key financial indicators like EPS and P/E, as shown in the example above. A change in the number of outstanding shares has the opposite impact of repurchase in the event of dilution: it worsens the company’s financial appearance.

Dividends and share buybacks are the two methods by that firms reward their stockholders in the stock market. When businesses have extra cash, they provide it to their shareholders in the form of dividends or stock buybacks. Both strategies demonstrate the company’s desire to maximize. shareholder value by making the best use of available resources. The key distinction between dividend payment and share buyback is that the former represents a certain return that will be taxed immediately, whilst the latter represents an uncertain future return that will be taxed when the shares are sold.

Change in Market Dynamics

Buyback of Shares

Over the last few decades, market dynamics have significantly evolved. In fact, share buybacks have surpassed dividends as a method of returning cash to shareholders. So, in today’s market, share buybacks are fairly common, and they have recently replaced dividends because the dividend distribution tax was very high until last year. While the same tax has been passed on to shareholders this year, promoters are still benefiting from share buybacks. The Companies Act 2013 (previously the Companies Act 1956) and the Securities and Exchange Board of India’s (SEBI) Buyback Regulation govern buyback in India. Tender offer and open market approach are two buyback strategies recommended by SEBI in India.

Corporations that participate in tender offers urge current shareholders to present their shares for acquisition, whereas companies that participate in open market share repurchases buy shares directly from stock exchanges. Based on the aforementioned differences and the institutional architecture in India, this study claims that managers choose the buyback strategy for various firm reasons. The regulations specifically state that the chance of selecting one offer over another is influenced by the agency’s cost of cash flow, signaling strength, promoter ownership, liquidity, and leverage.

Since these criteria are not mutually exclusive, more than one aspect could be at play when deciding which strategy to use. As a result, it is necessary to evaluate all of the motives at the same time in order to determine the factors that influence the decision to use one approach over another. 

First Instance of Buyback of Shares

JB Chemicals and Pharma, a renowned pharmaceutical company in India, was founded in 1976. JB Mody Chemicals and Pharmaceuticals were founded in the early 1990s with the goal of producing APIs and formulations. Pharma formulation specialties, radio diagnostics, APIs, and intermediates are all manufactured by the company. The company’s board of directors approved the first repurchase of up to 1,250,000 equity shares worth up to $500 million in 2017. The 400-per-share buyback represented 3.85 percent of the company’s equity share capital.

Companies that can utilize that capital to buy back more shares can therefore assist their stock prices to rise. A firm can buy back its own shares from the market if it has excess cash or money left over after investing in its business. Earnings per share are higher when there are fewer shares outstanding. Investors who sell back to the company get a good bargain because firms generally buy shares at a premium to the market price. Stock buybacks can help a company’s stock price rise. More buybacks may be appreciated at a time when most stocks are trading below their all-time highs.


MNCs were able to turn their Indian ventures into wholly owned subsidiaries thanks to share buybacks (WOS). It also permitted them to delist the shares of these businesses from the stock exchanges, shielding them from the stock market’s volatility (caused by scams and other market manipulations). MNCs may abuse the buyback option to raise their equity shares in Indian businesses, avoid public scrutiny and accountability, and avoid the Indian regulatory framework. 

Furthermore, the opportunity for MNCs to transform their Indian ventures into fully owned subsidiaries and delist their shares from stock exchanges gave them entire control over their operations, allowing them to repatriate profits and make more autonomous investment decisions. Minority shareholders allege that they have little choice but to sell their shares if MNCs purchase back the majority shareholders’ shares. 

Small investors in India are torn between whether the buyback option, combined with SEBI norms, genuinely protects their interests and provides them with a fair exit option, or whether it is a tool that leaves them with no options. allowing huge multinational corporations to have unlimited control over their divisions SEBI’s regulations make no provision for preventing good stocks from being delisted. Furthermore, the buyback price, which is established using the SEBI Takeover Code’s specifications, does not take into account the stock’s future potential.