SEBI Regulations And Guidelines On Share Buyback

Companies often turn to buybacks when surplus cash has built up, and there is no immediate use planned for that money elsewhere. In such cases, they buy back their listed shares and return money to shareholders. Over the years, companies such as Tata Consultancy Services, Infosys, and Larsen & Toubro have used buybacks as part of their capital allocation decisions.

For investors, a buyback usually draws attention because it can affect earnings per share, available floating stock, and sometimes even market sentiment. Since shareholders are directly involved in the process, companies must follow the framework laid down by the Securities and Exchange Board of India before moving ahead.

What Is Share Buyback?

Share buyback is also known as share repurchase. A buyback is a mechanism through which a company buys shares back from the market. A buyback can either be done through open market purchases or through the tender offer route.

Under the open market, the firm buys the shares back from the secondary market, whereas, under the tender offer, shareholders can tender their shares during the buyback offer.

Buyback of shares is used as a method of financial engineering. Companies buy back shares for a number of reasons, some of which are as follows:

• When a firm has substantial cash resources, it may like to buy its own shares from the market, especially when the prevailing rate of its shares in the market is much lower than its true value.
• In an environment where the threat of corporate takeovers has become real, share buybacks act as a defence mechanism for an entity. It safeguards against a hostile takeover by increasing the promoter’s holdings.
• In the process of mergers and acquisitions, corporates make subsequent use of share repurchases without increasing their capital base.

When a company plans to opt for buyback of shares, it needs to adhere to certain guidelines outlined by the SEBI.

What Is SEBI?

The Securities and Exchange Board of India (SEBI) regulates the securities market. It was formed in the year 1988 and received statutory powers under the SEBI Act, 1992.

The main functions of SEBI include designing and implementing certain rules and regulations in order to make the market a safe place for investment. The main regulatory function of the Securities and Exchange Board of India is to ensure effective management of the stock market.

The SEBI has recently revised the buyback regulations. Here are the latest SEBI guidelines for buyback of the shares:

SEBI Guidelines For Share Buyback

1. Maximum Limit Of Share Buyback

Paid-up capital and free reserves of the company are important factors in any share buyback. The amount of money received from the shareholders in exchange for stock constitutes the paid-up capital of a company. Free reserves include reserves, except those pre-specified in the Companies Act 2013, that a company may use freely for the distribution of dividends.

The SEBI guidelines indicate that the upper limit of share buyback is 25% or less than the total of the paid-up capital and free reserves of the company.

2. The Ratio Of The Aggregate Of Secured And Unsecured Debts

Share buyback is not approved by the SEBI if the ratio of the aggregate of secured and unsecured debts of a company is more than twice the paid-up capital and free reserves.

For example, a company has paid-up capital and free reserves amounting to ₹1,00,000 and secured and unsecured debts amounting to ₹2,50,000. This company has proposed a buyback of 1000 shares at ₹100 each, which will amount to ₹1,00,000. In this case, the buyback will not be approved by SEBI because the debt-to-equity ratio of the company will exceed 2:1 post buyback.

3. Fully Paid Back Securities

As per SEBI guidelines, buyback of only fully paid-up shares and securities is permitted.

4. Share Buyback For Decreasing Share Capital

Typically, share cancellations and share repurchases are two methods for reducing the share capital of a company. As per SEBI norms, no company has the power to buy back its shares unless the consequent reduction of its share capital is effected under Section 67 of the Companies Act, 2013.

5. Modes Of Buyback

The buyback of shares can be done via the following means:

(a) Free reserves- If the buyback of shares is made from free reserves, a sum equal to the nominal value of shares must be transferred to the Capital Redemption Reserve.

(b) Securities premium account- This is the extra money obtained when a company sells shares above their fair value. The money in this account can be used for a share buyback.

(c) Proceeds of an earlier issue- A company cannot buy back its shares/securities out of the proceeds of the earlier issue of the same type of shares/securities.

6. Restrictions On The Purchase Of Own Shares Or Securities

As per SEBI norms, a company may not be allowed to purchase its own shares through any subsidiary company or any investment company.

Also, a company with an unhealthy liquidity position may not be permitted to buy back its own shares. That is, companies that have defaulted on:

• Repayment of fixed deposits or interest on these deposits taken from investors or individuals

• Redemption of debentures or preferred shares,

• Repayment of term loans or interest from banks and any financial institution or banking company will not be allowed to buy back shares.

7. Approval For Buyback

The company shall not authorise any buyback unless:

a) The buyback is authorised by the Articles of Association of the Company

b) A special resolution has been passed in the general meeting of the company authorising the buy-back. In case it is a listed company, then the approval should be made by means of a postal ballot.

Moreover, the buyback shares should be free from the lock-in period. If the quantity of buyback is equal to or less than 10% of the paid-up capital and free reserves, then the buyback can be made by a Board resolution.

8. Max Tenure To Complete The Buyback Process

The process of buyback of shares shall be completed within a period of one year from the date of the passing of the resolution by the board of directors of the company.

9. Clarification On The Timeline For A Public Announcement

The company authorised to do the buyback of shares shall make a public announcement within two working days of its declaration.

Two days will be from the date of declaration of the results of the postal ballot in the case of a special resolution or the board of directors' resolution.

10. Completion Of The Buyback

Within 30 days of completion of the buyback of shares, the company shall file a return containing particulars relating to the buyback with the Registrar of Companies and the Board according to the format specified in the Companies Act, 2013.

11. Seeking Shareholders’ Approval

Two types of resolutions, namely an ordinary resolution and a special resolution, are involved in obtaining approval for a buyback from the shareholders. An ordinary resolution is where at least 51% members are in favour, and a special resolution is where at least 75% members are in favour of the buyback.

An ordinary resolution is sufficient when the buyback amounts are up to 10% of the total paid-up equity capital and free reserves of the company, but a special resolution needs to be passed when the buyback amounts to 25% of the total paid-up capital and free reserves.

12. Modes Of Dispatch

a) The company shall dispatch its Letter of Offer through electronic means in accordance with the provisions of the Companies Act, 2013.

b) A physical copy of the Letter of Offer should also be provided on receipt of the request from any shareholder to receive such a copy.

13. Participation Of An Eligible Public Shareholder Who Does Not Receive The Tender Offer/Offer Form

To safeguard the interests of the bona fide shareholders, an eligible public shareholder (whose name is in the company’s register but has not received the offer due to certain issues) who does not receive the tender offer or offer form can participate in the buyback and tender shares in the manner as provided by the Board.

14. Rights Of An Unregistered Shareholder To Participate In The Buyback Process

To safeguard the interest of the shareholders, an unregistered shareholder (whose name is not officially registered in the company’s register yet) may also tender his shares for buyback by submitting the duly executed transfer deed for transfer of shares in his name, along with the offer form & other documents as required for transfer.

15. SEBI’s Power To Allow Tendering Of Shares And Settlement Of The Same Through The Stock Exchange Mechanism

SEBI has introduced a stock exchange mechanism for tendering and settlement of shares through stock exchanges.

So, the companies shall facilitate the tendering of shares by the shareholders and settlement of the same through the stock exchange mechanism in the manner as provided by the Board.

Where a company buys back its shares/specified securities under this section, it shall maintain-

• a register of the shares/securities bought,

• the consideration paid for the shares/securities bought back

• the date of cancellation of shares/securities

• the date of extinguishing & physically destroying the shares/securities and such other as prescribed in Sub-Section (9) of Section 68 of the Companies Act, 2013.

16. Interest-Bearing Escrow Account

In order to ensure that the merchant banker’s funds are available at the time of making payment to shareholders, the cash component of the escrow account shall be held in an interest-bearing account.

17. Deletion Of Certain Provisions

All provisions related to

a) Power of the Board to order an investigation

b) Duty to produce records, etc.

c) Submission of the report to the Board

under Regulation 1998, have been removed.

Compliance Checklist For Companies

Before a buyback is announced, companies usually review a few practical areas internally so that execution does not run into delays later. Along with regulatory approval, internal preparedness matters just as much.

Some commonly checked points include:

• whether the proposed buyback fits into the company’s current cash position and capital plans

• whether the announcement period clashes with any unpublished price-sensitive developments

• whether board papers, internal approvals, and supporting documents are in place

• whether intermediaries, such as the merchant banker, are ready for filing and settlement work

• whether shareholder-facing documents can be issued within the required timeline

Even when approvals are in place, delays in documentation or settlement can raise avoidable compliance questions.

Recent Amendments And Their Impact On Share Buyback

The Securities and Exchange Board of India (SEBI) has, over the years, steadily tightened the rules governing these transactions. A key change for retail investors is the reservation built into the tender process. The reserved share is 15% of the total offer size, and it applies to investors whose holdings are worth up to ₹2 lakh on the record date.

This gives retail investors a better chance of acceptance because they participate within a separate category instead of competing directly with larger shareholders.

Tax treatment has also changed recently. Starting 1 April 2026, any gain arising from a buyback will be taxed under capital gains rules in the shareholder’s hands. The gain is worked out after adjusting the original purchase cost. For listed shares, the applicable rate is 12.5% (with an exemption of up to ₹1.25 lakhs) for long-term holdings and 20% for short-term holdings. For promoter shares, tax will be applicable at 22% for corporate promoters and at 30% for individual promoters.

With these amendments, it is now easier for investors to assess retail participation and calculate their post-tax returns accurately.

Conclusion

A share buyback can be an effective way to boost an entity’s undervalued share price and reduce dilution. It is not necessary that every share buyback will benefit shareholders.

So, it’s always advisable to check the company's historical track record and then make a wise decision.