NISM-Series-XV: Research Analyst · Corporate Actions

Buyback of Shares: Methods, Limits and EPS Effect

Updated 11 October 2026

A buyback is when a company repurchases its own shares from shareholders and extinguishes them. It is done by tender offer or through the open market. To solve questions, identify the method, apply the SEBI and Companies Act limits, then compute the fall in share count and the rise in EPS.

Understand Buyback of Shares

A buyback means a company uses its own cash or reserves to purchase its own shares. The shares bought are cancelled, so the number of shares outstanding falls. It is a way of returning cash to shareholders, like a dividend, but only to those who choose to sell.

There are two main methods. In a tender offer, the company offers to buy a fixed number of shares at a fixed price from all shareholders as on a record date, in proportion to their holdings. The price is usually at a premium to the market price. In an open market buyback, the company buys through the stock exchanges at market prices over a period, so the price is not fixed in advance.

Why do companies do it? Common motives are returning surplus cash, improving EPS and return on equity, supporting the share price when management thinks it is undervalued, and signalling confidence. Another motive is adjusting the capital structure. A buyback can also raise the promoter's percentage holding without the promoter buying anything.

The effect is mechanical. Fewer shares mean higher EPS if profit stays the same. Cash falls, so equity falls and the company becomes more leveraged. A higher EPS is not proof of value creation. If the company pays more than the shares are worth, value moves from remaining holders to those who sold.

Buybacks are regulated by the Companies Act and the SEBI (Buy-Back of Securities) Regulations, 2018. The rules cap the size, the debt level after the buyback, and the timing. They also reserve a part of tender offers for small shareholders.

Key formulas to remember

Size limit (Companies Act): Board resolution: Buyback ≤ 10% of (paid-up capital + free reserves). Special resolution of shareholders: Buyback ≤ 25% of (paid-up capital + free reserves); Board resolution is enough up to 10% of paid-up capital and free reserves. A buyback above 10% and up to 25% of this aggregate needs shareholder approval by special resolution. A board-approved buyback under the 10% limit has its own additional conditions, so do not treat 10% as the only test. Separately, for equity shares, the number bought in a financial year is capped at 25% of total paid-up equity capital. This share-count cap is a different test from the 25% money limit. These limits apply to both methods, but an open-market buyback has further restrictions (see the next item).
Open market buyback: extra limits: Open market buyback size ≤ 15% of (paid-up capital + free reserves); at least 75% of the amount earmarked must be utilised; Under the SEBI (Buy-Back of Securities) Regulations, 2018, the open market route through stock exchanges is subject to additional restrictions beyond the general 10% and 25% limits. The size is capped at 15% of paid-up capital and free reserves, and the company must use at least 75% of the amount it earmarked. Do not assume a tender offer and an open market buyback follow identical rules.
Post-buyback leverage: Total debt ≤ 2 × (paid-up capital + free reserves); This is the 2:1 debt-equity test, applied after the buyback.
Small shareholder reservation: For a tender offer, reserved portion = higher of (15% of the number of securities to be bought back) or (the number of securities small shareholders are entitled to in proportion to their holding); A small shareholder holds securities with a market value of not more than ₹2,00,000 on the record date. This reservation applies to buybacks through tender offer only. It does not apply to open market buybacks.
Shares bought back: Number bought = Buyback amount ÷ Buyback price; Use this to find the new share count.
EPS after buyback: New EPS = Net profit ÷ (Old shares − Shares bought back); Assumes profit is unchanged. In practice, lost interest on the cash used lowers profit slightly.
Timing rules: Complete within 1 year of the resolution; no further buyback offer within 1 year from the closure of the preceding offer; no issue of the same kind of shares for 6 months from the closure of the buyback; The 6-month period runs from the closure of the buyback, not from the resolution. Exceptions include bonus shares and conversion of warrants, preference shares or debentures into equity. Bought-back shares are extinguished within 7 days of completion.

How to solve Buyback of Shares questions

Use this order for any buyback question, whether it is theory or numbers.

1Identify the method: tender offer (fixed price, proportional, record date) or open market (market price, through exchanges).
2If the question is about limits, find paid-up capital plus free reserves, then take 10% (board) or 25% (special resolution). If the method is open market, also check the 15% size cap and the 75% utilisation rule.
3Check the leverage condition: debt must not exceed twice paid-up capital plus free reserves after the buyback.
4Compute shares bought as amount ÷ price, then subtract from old shares.
5Compute new EPS as profit ÷ new shares. Compare with old EPS, and with P/E if asked.
6State the effect on cash, equity, promoter holding percentage and return on equity.
7Match your result to the options and watch for trap options that use 10% where 25% applies, or the reverse.

Quickest way: Three-number shortcut

When to use it: For numerical questions on size limit and EPS when time is short.

Add paid-up capital and free reserves. Take 10% and 25% of it immediately.
Pick 10% if only a board resolution is mentioned, 25% if a special resolution is mentioned.
Divide the amount by price to get shares. Subtract from old shares.
EPS rises in the ratio old shares ÷ new shares. For example, 10 crore to 9 crore shares raises EPS by one-ninth.

Common mistakes in Buyback of Shares

Treating 25% as the limit that a board resolution can approve.
Students remember only the headline 25% figure.
Fix: Board resolution: up to 10%. Special resolution: up to 25%. Both are of paid-up capital plus free reserves.
Saying a tender offer happens at the market price.
Tender offer and open market get mixed up.
Fix: Tender offer has a fixed price, usually at a premium, and is proportional to holdings. Open market is at prevailing market prices.
Applying the same size rules to tender offer and open market buybacks.
Students learn only the general 10% and 25% limits.
Fix: An open market buyback has additional SEBI restrictions: size capped at 15% of paid-up capital and free reserves, and at least 75% of the earmarked amount must be utilised.
Calculating the new EPS with the old share count.
Students forget that bought-back shares are cancelled.
Fix: Always subtract shares bought back before dividing profit.
Assuming a higher EPS means the company is worth more.
EPS is the most visible number.
Fix: Cash leaves the company. Equity falls and leverage rises. The EPS gain is a share-count effect, not new earnings.
Forgetting the small shareholder reservation in tender offers, or applying it to open market buybacks.
The rule is detailed and easy to skip, and the two methods get mixed up.
Fix: In a tender offer, the reserved portion is the higher of 15% of the securities to be bought back or the number small shareholders are entitled to by their holding. Small means a market value of up to ₹2,00,000 on the record date. It does not apply to open market buybacks.
Thinking a company can issue fresh shares of the same kind right after a buyback.
Students ignore the cooling-off rule.
Fix: No fresh issue of the same kind for 6 months from the closure of the buyback, apart from exceptions such as bonus shares and conversion of warrants.

Worked examples

Example 1

A company has net profit of ₹100 crore and 10 crore shares. It announces a buyback of ₹150 crore at ₹150 per share. Assuming profit is unchanged, what is the new EPS?

Show the solution

Old EPS = 100 ÷ 10 = ₹10.
Shares bought back = ₹150 crore ÷ ₹150 = 1 crore shares.
New share count = 10 − 1 = 9 crore shares.
New EPS = 100 ÷ 9 = ₹11.11 (approx).

Answer: New EPS is about ₹11.11, up from ₹10, a rise of about 11.1%, purely because the share count fell.

Example 2

A company has paid-up capital of ₹50 crore and free reserves of ₹350 crore. What is the maximum buyback the board can approve without shareholder approval, and how many shares can be bought at ₹200 each at that limit?

Show the solution

Paid-up capital plus free reserves = 50 + 350 = ₹400 crore.
Board resolution limit is 10% of this = ₹40 crore.
Shares = ₹40 crore ÷ ₹200 = 20,00,000 shares.

Answer: The board can approve up to ₹40 crore, which buys 20,00,000 shares at ₹200. Up to ₹100 crore (25%) would need a special resolution.

Exam tips

Expect direct recall questions on 10% versus 25% and the 2:1 debt-equity limit. Learn them as a pair.
Tender offer versus open market is a favourite comparison. Remember fixed price and proportional for tender, market price and exchange for open market.
Numerical questions are usually simple: shares bought, new EPS, maybe P/E. Do them carefully, since wrong answers cost marks.
Read for the word 'assuming profit unchanged'. If it is absent, think about lost interest income on cash used.
Motive questions: pick answers about returning surplus cash and signalling, not about raising fresh funds.

Practice questions from Corporate Actions

Buyback of Shares: frequently asked questions

What is the difference between tender offer and open market buyback?

In a tender offer, the company offers a fixed price to shareholders as on a record date, usually at a premium, and buys in proportion to what they tender. In an open market buyback, the company buys on the stock exchanges at prevailing prices over time. The open market route also has extra SEBI limits on size and utilisation.

What are the SEBI and Companies Act limits on a buyback?

A board resolution is enough up to 10% of paid-up capital plus free reserves, and that route has its own additional conditions. Up to 25% of paid-up capital plus free reserves needs a special resolution of shareholders. Separately, the number of equity shares bought in a financial year cannot exceed 25% of total paid-up equity capital. For an open market buyback, the size is further capped at 15% of paid-up capital and free reserves, and at least 75% of the earmarked amount must be utilised. After the buyback, debt must not exceed twice paid-up capital plus free reserves.

Why do companies buy back shares?

Common reasons are returning surplus cash, raising EPS and return on equity, supporting the share price and signalling that management thinks the shares are undervalued. It can also adjust the capital structure.

Does a buyback always increase the share price?

No. It can lift EPS and sentiment, but the price depends on how the market sees the use of cash and the company's prospects. Paying too high a price can transfer value away from continuing shareholders.