Introduction:
In simple terms, a buyback of shares is a process through which a company uses its available funds to purchase its own shares from existing shareholders.
A company may undertake a buyback for various strategic and financial reasons, such as:
- Returning surplus cash to shareholders;
- Optimising its capital structure;
- Reducing the number of outstanding shares, which may improve metrics such as EPS;
- Providing an exit opportunity to shareholders; or
- Signalling that the company believes its shares are undervalued
- Any other justifiable reason for the company
- Should it invite shareholders to tender their shares?
- Or should it buy them directly from the stock exchange?
- In the tender route, the company announces the fixed buyback price which can be modified as well before the offer period begins provided the buyback size remains the same.
- Under the open market route, it announces the maximum buyback price (cannot be modified later). The actual purchase price can therefore vary, depending on the prevailing market price and the company’s purchase orders.
- Under the tender route, there is no minimum utilisation requirement of the buyback amount.
- Under the open market route, the company is required to utilise at least 75% of the amount earmarked for the buyback, with at least 40% utilised during the initial half of the specified duration, subject to the applicable framework.
But the objective of the buyback is only one part of the decision.
The route through which the buyback is executed can significantly affect how the transaction actually plays out. This is why the mechanism of buyback matters on how should the company buy back its shares.
Hence the first question arises that how should the company buy back its shares?
- Should it invite shareholders to tender their shares?
- Or should it buy them directly from the stock exchange?
At first, both may appear to be different ways of achieving the same result. But once you start looking at how each route actually works, the differences become quite interesting. And with the open market route through stock exchanges becoming available again from August 1, 2026, this is a decision that listed companies may increasingly find themselves considering.
Let us look into few key differences between both the routes:
Opportunity to tender shares:
Suppose the company announces a tender offer and says: “The maximum size of buyback is Rs. 100 crores and we will buy back our shares at ₹1,000 per share through tender route to the shareholders as on the defined record date.”
Thus, the shareholders have a defined opportunity to participate at a defined price. They can decide whether they want to tender their shares or not. Further, reservation is also provided for small shareholders – 15% of the buyback size or the number of shares entitled to them based on their shareholding, whichever is higher.
But then What if everyone tenders shares in buyback? The company may want to buy, say, 10 lakh shares, but shareholders may tender 20 lakh shares. The company obviously cannot buy all of them.
Instead of the same, what if the company doesn’t ask shareholders to tender at all?
Instead of inviting shareholders to tender, the company goes to the stock exchange and starts buying its own shares from the market wherein it announces a maximum buyback price for buyback. It may sound easier.
But “If Mr. X want to sell his shares, will the company actually buy them?” Not necessarily!!
The company has to place its purchase orders in the market. There has to be a matching sell order. There needs to be sufficient liquidity. And the company’s purchase limit for that period should not already have been exhausted. So, unlike a tender offer, the shareholder’s desire to sell does not automatically create an obligation for the company to buy the shares.
Thus, Tender Offer: Shareholder has a defined opportunity to tender.
Open Market: Shareholder has an opportunity to sell, but the actual purchase depends on the market.
Buyback price and number of shares to be bought back:
And now the question of price becomes important.
- In the tender route, the company announces the fixed buyback price which can be modified as well before the offer period begins provided the buyback size remains the same.
- Under the open market route, it announces the maximum buyback price (cannot be modified later). The actual purchase price can therefore vary, depending on the prevailing market price and the company’s purchase orders.
Thus, under open market route – the Company can buy shares at a lower price too. Accordingly, under the open market route, the company may potentially acquire more shares within the overall buyback size if purchases happen at lower prices, subject to the applicable limits.
Under the tender route, the number of shares proposed to be bought back is determined upfront.
So tender route provides greater certainty, but open market route provides greater flexibility for buyback.
Market liquidity of Company’s shares:
But flexibility works only when the market cooperates. Imagine the company’s shares are not actively traded. The company wants to buy shares from the market, but there simply aren’t enough sellers.
What happens? No sellers in the market = no purchase by the company.
This is why liquidity becomes an important route-selection factor. The open market buyback is allowed only if shares are frequently traded.
A tender offer does not depend on daily market liquidity in the same way. An eligible shareholder can tender shares even if the stock is relatively less liquid.
Thus, open market route works only when the stock of Company is liquid enough but the tender route can be done even when the Company’s shares are illiquid.
Intent of the Promoters:
The Company is also required to evaluate – What does the promoter want to do?
Until now, we have looked at the transaction largely from the perspective of the company and public shareholders. But what if the promoter also wants to participate?
Under the tender route, promoters can participate, subject to the applicable conditions and prescribed communication of their intention.
Under the open market route, the promoter/promoter group holdings are frozen at the ISIN level during the relevant period, and promoters cannot participate in the buyback through this route. Promoters are also not permitted to purchase shares during the buyback period.
So promoter intent is not merely a disclosure consideration. It can actually influence the choice of route.
Process for buyback of Physical shareholders
Now, What if some shareholders still hold physical shares?
Physical shareholders can participate in the buyback, subject to the prescribed mechanism. Also, the open market route has now prescribed that physical shareholders can buyback through a separate window created by stock exchanges.
So physical shareholders base is not a concern for either of the buyback routes. However, the process for tender of shares by those shareholders is yet to be seen.
Timelines for buyback:
The main question arises on the targeted timelines by which the company want the buyback process to be done?
The tender offer has an offer period of only 5 working days. The open market route operates for 66 working days.
Hence, the tender route can provide a much shorter execution window, whereas the open market route gives the company considerably more time and flexibility to purchase shares from the market.
Mandatory Deployment of Buyback funds:
However, an important question arises – “Can we realistically deploy the money we have set aside for the buyback?”
- Under the tender route, there is no minimum utilisation requirement of the buyback amount.
- Under the open market route, the company is required to utilise at least 75% of the amount earmarked for the buyback, with at least 40% utilised during the initial half of the specified duration, subject to the applicable framework.
This matters because an open market buyback depends on actual market opportunities. The company may have the intention to buy. But the market ultimately determines how many shares are available to it at the desired prices. This may also lead to difficulties in completion of buyback.
Some parameters for ease of decision making:
Considering all the above differences, it becomes very challenging to decide which route should the Board choose.
It is understood very clearly that there is no universally better route. The evaluation is required to be done on the basis of route which is better for the Company depending upon following illustrative parameters:
| If the company values: Price certaintyDefined shareholder participationSmall shareholder reservationFaster completionAbility to execute without depending heavily on daily market liquidity → Tender Offer may be more suitable. | If the company values: Flexibility in purchase timingFlexibility in actual purchase price within the maximum priceA longer purchase windowSufficient market liquidityPotential to acquire more shares if purchases happen at lower prices → Open Market may be attractive. |
Conclusion:
A buyback may be one corporate action. But it can be two very different journeys depending upon what Company chooses. The reintroduced stock exchange route may well make buybacks more flexible for listed companies. But its success will ultimately depend on whether companies use it as a carefully evaluated capital allocation strategy, rather than simply treating it as an easier substitute for the tender offer.
Hence, the Board should step back and look at the bigger picture:
- What is the objective of the buyback?
- What does the shareholder base look like?
- How liquid is the stock?
- Do promoters want to participate?
- How much price certainty is important?
- How quickly does the company want to complete the exercise?
- Can the company meet the utilisation requirements?
- Is it operationally equipped to manage the ongoing requirements of an open market buyback?
The responses to above questions together will enable the company to make right choice to identify the better route of buyback for the Company.
Mr. Saurabh Agarwal and Ms. Priyanka Nagda authored the article!