Methods for Share Buybacks: Tender and Open Market

When a company decides to buy back its own shares, the outline is usually one line in the balance sheet: shares outstanding go down, and the money in the bank goes down too. But the mechanics of how a company actually gets those shares back from investors can differ quite a bit. Under the Companies Act, 2013 and the SEBI (Buy-back of Securities) Regulations, 2018, listed companies in India can choose between two broad routes: the tender offer method and open market purchases. Each has its own pricing logic, timeline, and level of shareholder involvement, and knowing the difference matters both for exam answers and for understanding real corporate announcements.

Two routes, one regulatory framework 🔗

Section 68 of the Companies Act, 2013 permits a company to purchase its own shares or other specified securities out of free reserves, the securities premium account, or the proceeds of a fresh issue of a different kind of security. Regardless of the method chosen, the total buyback cannot exceed 25% of the company’s paid-up capital and free reserves, and the post-buyback debt cannot be more than twice the paid-up capital and free reserves. Listed companies must additionally follow SEBI’s buyback rules, which lay down the procedure, disclosure norms, and timelines for each method.

Within this framework, the tender offer method and open market purchases represent two very different philosophies. One is a direct, fixed-price offer to every shareholder at once. The other is a gradual, market-driven repurchase spread over time.

The tender offer method 🔗

In a tender offer, the company makes a formal offer to all existing shareholders, inviting them to tender (offer) their shares for buyback within a fixed window, at a price decided in advance. This route is considered the most transparent and equitable of the two because every shareholder gets the same opportunity, at the same price, at the same time.

Why the tender price is usually above market value 🔗

Companies typically set the buyback price at a premium to the prevailing market price. This premium acts as an incentive for shareholders to participate, since selling in the open market at the going rate would not create the same appeal. A higher-than-market price also signals to the market that the management believes the shares are undervalued, which is one of the reasons buyback announcements often move share prices even before the actual repurchase begins.

What happens if the offer is oversubscribed 🔗

Because the price is attractive, a tender offer often receives far more shares than the company intended to buy back. When this happens, shares are accepted on a proportionate basis as per the buyback ratio, meaning every shareholder who tendered gets a slice of the acceptance rather than a first-come-first-served allocation. If some shareholders tender less than their entitled ratio, the surplus room created is used to accept additional shares from those who tendered more, ensuring the offer size is fully utilised without favouring any single investor. This proportionate mechanism is central to why the tender route is viewed as fair to both large and small shareholders.

Key procedural steps 🔗

A tender offer follows a fairly structured timeline. After board or shareholder approval, the company files the resolution with SEBI and the stock exchanges, opens an escrow account to secure the buyback consideration, and issues a letter of offer to shareholders. The offer window generally remains open for a short, fixed period, after which accepted shares are paid for, unaccepted shares are returned to shareholders, and the repurchased securities are physically extinguished, usually within a week of completion. The company must also maintain a register of the securities bought back, and a portion of the buyback size is typically reserved for small shareholders to improve retail participation.

Open market purchases 🔗

The second route, open market purchases, allows a company to buy back shares directly from the market over a period of time rather than through a single fixed-price window. Instead of asking shareholders to tender their shares, the company (through its brokers) simply purchases shares the way any other investor would, subject to regulatory limits on price, volume, and timing. This method offers companies more flexibility, since they can time their purchases to take advantage of favourable market conditions, but it also means the process stretches out over weeks or months rather than days.

The stock exchange route: a method that was paused and has now returned 🔗

Historically, one form of open market purchase was buying shares directly through the stock exchange’s trading system, similar to a regular market transaction. However, SEBI found that this route tended to favour institutional investors and algorithmic traders, who could act faster on the exchange’s price-time priority system, leaving ordinary retail shareholders with little real opportunity to participate. Because of this fairness concern, along with issues in how buyback tax was structured at the time, SEBI phased out the stock exchange route in stages and discontinued it entirely from April 1, 2025.

Interestingly, this is not the end of the story. Once the tax treatment of buybacks was rationalised, with the consideration being taxed as capital gains in the hands of shareholders rather than as a company-level tax, SEBI’s original fairness concerns eased considerably. As a result, the regulator approved amendments to reintroduce open market buybacks through the stock exchange route with effect from August 1, 2026, alongside safeguards such as daily purchase volume limits, price bands, and restrictions on promoter participation during the buyback window. This back-and-forth is a good example of how buyback regulation in India keeps evolving in response to market fairness and taxation issues, so it’s worth knowing this history rather than treating the rules as fixed forever.

The book-building route 🔗

The other form of open market purchase is through book building, more precisely called reverse book building when used for a buyback. Here, a merchant banker (technically a Book Running Lead Manager) collects bids from shareholders willing to sell, at or above a floor price set by the company. Shareholders submit their offers electronically through the exchange’s bidding system over a specified period, and the final buyback price is determined based on these bids, generally set at the price at which the company can buy back the desired number of shares. Unlike the fixed-price tender offer, reverse book building lets the market itself discover the appropriate price, which can work in the company’s favour if shareholders bid competitively.

Reverse book building is also widely used outside of buybacks, most notably in voluntary delisting of shares from stock exchanges, where a promoter needs to buy out public shareholders at a fair, market-discovered price.

Tender offer versus open market: a quick comparison 🔗

Which method do companies actually prefer? 🔗

Research tracking Indian buybacks over nearly two decades found that open market repurchases have historically outnumbered tender offers by roughly two to one, largely because they gave companies more flexibility and lower compliance costs. However, that pattern started shifting toward tender offers after 2013, once SEBI tightened rules around open market buybacks. Companies with lower leverage and stronger free cash flow have tended to favour open market purchases, while firms wanting a strong, credible signal to the market, or aiming to shift their debt-equity ratio, have leaned toward the tender route because it lets them commit to a fixed size and price.

From a capital management standpoint, the choice also reflects how urgently a company wants to return cash. A tender offer sends a quick, visible signal and completes in weeks, which suits companies wanting to reassure shareholders during a specific period, such as after a large cash surplus or a strategic restructuring. Open market purchases suit companies that prefer to buy gradually, perhaps to support the stock price over a longer stretch or to avoid disrupting trading volumes with a single large transaction.

Why this distinction matters beyond the exam 🔗

For accounting and finance purposes, the method chosen affects how the transaction is recorded, disclosed, and taxed. A tender offer buyback is easier to account for because the price and quantity are fixed at the outset, so the reduction in share capital, securities premium, and reserves can be computed precisely. Open market purchases, by contrast, involve multiple transactions at varying prices over time, which means the accounting entries accumulate gradually rather than being booked in one go. Understanding both methods, then, is not just about knowing definitions, but about being able to read a company’s buyback announcement and predict how its financial statements will look once the process is complete.

What do you think? If you were advising a company that wanted to signal confidence to shareholders quickly, would you recommend the tender offer method or open market purchases? And now that the stock exchange route for open market buybacks is back, do you think it will regain the popularity it had before 2025?

References

1. https://vinodkothari.com/2026/05/sebi-proposes-revival-of-open-market-buy-backs-through-stock-exchange/
2. https://www.corplawupdates.in/updates/buy-back-of-shares-companies-act-2013-sebi-buyback-regulations
3. https://www.mondaq.com/india/shareholders/1810804/sebi-re-introduction-of-open-market-buy-backs-through-stock-exchanges
4. https://www.indiafilings.com/learn/modes-of-buy-back-of-shares/
5. https://www.nseindia.com/static/products-services/initial-public-offerings-reverse-book-building
6. https://www.tandfonline.com/doi/pdf/10.1080/23322039.2020.1782073