Buyback

How it works

In a buyback (share repurchase), a company uses its surplus cash to buy back its own shares, then extinguishes them. With fewer shares outstanding, each remaining share represents a larger slice of the company — so metrics like EPS rise even if total profit is unchanged. Companies in India do buybacks via a tender offer (shareholders offer shares at a fixed price, often above market) or through the open market.

Why companies do it

A buyback is a way to return cash to shareholders, much like a dividend, and often signals that management believes the stock is undervalued or that it has more cash than profitable projects to fund. By shrinking the share count, it can support the share price and improve per-share metrics. Promoters and long-term holders may also see it as tax-efficient capital return.

In India

Buybacks are common among cash-rich IT and FMCG companies like Infosys, TCS and others. They are regulated by SEBI, with rules on size, pricing and the buyback route. Importantly, the tax treatment changed: from October 2024, buyback proceeds are taxed in the shareholder's hands as deemed dividend (at slab rate), rather than the company paying buyback tax — a significant shift that altered the appeal of buybacks for some investors.

Common mistakes

Investors sometimes assume a buyback is always good news — but a buyback funded by debt, or done at an inflated price, can destroy value. Others over-focus on the EPS bump while ignoring whether the cash could have been better used. And with the tax change, the net benefit to a shareholder depends on their tax slab. Judge a buyback by whether the shares look genuinely cheap, how it is funded (cash versus debt), whether it is a one-off or a regular capital-return habit, and your own after-tax outcome under the current rules — not just the eye-catching tender price in the headline.