A share buyback, or repurchase, happens when a company purchases its own shares from existing shareholders. These shares are then canceled, reducing the total number of shares available in the market.

An easy way to picture this is through a pizza analogy. Imagine dividing one pizza into eight slices — each slice is relatively small. But if the same pizza is divided into six slices, each piece is larger. Similarly, when companies buy back shares, each remaining share represents a bigger portion of the company’s earnings, which increases earnings per share (EPS).

In India, buybacks are regulated by SEBI (Securities and Exchange Board of India) to ensure fairness and transparency. Companies typically use two methods:

• Tender Offer, where shareholders can sell their shares to the company at a fixed premium price.
• Open Market Purchase, where the company buys shares through stock exchanges over time.

Both approaches have implications for investors, which we’ll discuss in detail later.

Share Buybacks serve specific purposes in India’s corporate environment. Here are the main reasons:

• Boosting Earnings Per Share (EPS): By reducing the number of shares in circulation, companies automatically improve their EPS. Infosys and TCS have used buybacks repeatedly to strengthen this metric, making their financial performance look sharper.
• Signaling Confidence: Large IT firms such as Infosys, Wipro, and HCL Tech often announce buybacks to signal that they believe their stock is undervalued and their outlook remains strong. It sends a clear message: “We believe in our growth story.”
• Returning Excess Cash: Instead of paying large dividends — which create expectations for future payouts — buybacks allow companies to reward shareholders flexibly. Wipro is a prime example of a company that often uses buybacks to distribute surplus cash.
• Improving Valuation Metrics: Buybacks lift EPS and Return on Equity (ROE), enhancing the company’s overall valuation. Investors can consider these metrics alongside portfolio diversification strategies to balance risk in their investment portfolio.
• Preventing Takeovers: Though rare in India, buybacks can make hostile takeovers harder by reducing the number of shares available in the market.

Overall, buybacks are most common in cash-rich sectors like IT and FMCG, where companies have limited reinvestment opportunities but strong reserves.

Buybacks offer clear benefits but also come with drawbacks.

The debate highlights a key point: while buybacks reward shareholders today, they may come at the expense of tomorrow’s innovation.

SEBI allows two main methods for buybacks:

• Tender Offer: The company offers to buy shares directly from shareholders at a premium price. SEBI ensures that small investors (holding up to ?2 lakh in shares) get a reserved quota, making this method highly accessible for retail investors.
• Open Market Purchase: Here, the company repurchases shares through stock exchanges over a period of time. The price depends on market movements.

Regulatory Note: Buybacks in India are capped at 25% of a company’s paid-up capital and free reserves. A company can conduct only one buyback in any 12-month period.

Read More: How to Open Demat Account with Arham Wealth?

For retail investors, buybacks can be attractive opportunities, but decisions should be made carefully.

• Check the Premium: Compare the buyback price with the current market price. A significant premium could mean quick gains.
• Assess Fundamentals: For companies like Infosys or TCS, it may be better to stay invested long-term even after the buyback.
• Use the Retail Quota: Tender offers provide a fair chance for small investors to participate, which can make them worthwhile.
• Consider Partial Tendering: Sometimes selling a portion of your holdings allows you to book profits while still holding shares for long-term growth.

Participating in buybacks via a Demat account and integrating them into a portfolio diversification strategy can help investors optimize returns while managing risk.

Buybacks are becoming a defining feature of India’s corporate landscape. By reducing the number of outstanding shares, they increase EPS, strengthen valuation ratios, and reward shareholders.

The trend is especially strong among cash-rich companies in IT and FMCG, which prefer buybacks as a flexible way of returning money to investors. For shareholders, the key is to look beyond the immediate payout and view buybacks as an indicator of how companies manage their reserves and future strategies.

As more buyback announcements appear on NSE and BSE, investors should track them closely and evaluate whether participating fits into their broader investment goals.

Partner with Arham Wealth to Make the Most of Buybacks

Navigating buybacks and investment opportunities can be complex. Arham Wealth, a trusted Surat-based share and commodity broking firm, helps investors make informed decisions with expert guidance, seamless paperless account opening, and timely market insights. Whether it’s participating in buybacks, managing your Demat account, or building a diversified portfolio, Arham Wealth ensures you stay ahead in the Indian markets.