Buyback and tender offers on Zerodha

A share buyback (also called a share repurchase) is a corporate action where a company purchases its own shares from existing shareholders, reducing the total shares outstanding. In India, listed companies can conduct buybacks through two routes: the tender offer route (through the exchange platform) and the open market route (through the secondary market). Zerodha facilitates shareholder participation in tender offer buybacks through Kite.

Tender offers are distinct from open market buybacks: in a tender offer, the company announces a buyback price, a buyback period, and invites shareholders to tender their shares at the buyback price or below. Shares tendered at or below the final buyback price are accepted (subject to the company’s acceptance ratio). The open market buyback does not require any action from individual shareholders; the company buys shares from the exchange like any other buyer.

Regulatory framework

SEBI (Buy-Back of Securities) Regulations, 2018

Buybacks in India are governed by the SEBI (Buy-Back of Securities) Regulations, 2018 (replacing the earlier 2013 regulations). Key provisions:

• Maximum buyback size: A company can buy back up to 25% of its total paid-up share capital and free reserves in a single financial year (increased from 10% via a special resolution, or 10% via a board resolution).
• Sources of funds: Buybacks must be funded from free reserves, securities premium, or proceeds of earlier issue (not borrowed funds).
• Tender offer vs open market: Companies with buyback size greater than 15% of paid-up capital must use the tender offer route.
• Mandatory escrow: Companies conducting tender offer buybacks must deposit 25% of the total buyback amount in an escrow account with a bank or in the form of a bank guarantee before the buyback opens.
• Post-buyback restriction: After a buyback, the company cannot issue fresh equity (other than ESOPs) for one year.

Exchange platform for tender offers

SEBI mandated exchange-based clearing for tender offer buybacks through Circular SEBI/HO/CFD/DIL2/CIR/P/2016/56. Both NSE and BSE provide a tender offer platform through their respective clearing corporations (NCL and ICCL), with settlement and share transfer handled by the clearing corporation.

Tender offer process on Zerodha

Eligibility

Shareholders who hold the company’s shares in their Zerodha demat account (at CDSL) on the buyback record date are eligible to participate. Shares purchased after the record date are not eligible.

The buyback ratio is published by the company: it specifies the reserved portion for small shareholders (typically shareholders holding shares worth up to Rs 2,00,000 on record date) and the general category.

Tendering shares via Kite

Zerodha facilitates tender offer participation through the Kite platform’s corporate action section:

1. The investor logs in to Kite and navigates to the buyback section when an eligible buyback is active.
2. The investor enters the number of shares to tender (cannot exceed eligible quantity).
3. Zerodha submits the tender order to the exchange’s buyback platform on behalf of the investor.
4. The tendered shares are blocked in the demat account (an encumbrance is placed by CDSL); the investor cannot sell these shares during the tender period.
5. On acceptance day, the exchange/clearing corporation calculates the acceptance ratio based on total shares tendered vs total shares the company will buy back.
6. Accepted shares are transferred to the company; the buyback consideration is credited to the investor’s bank account within the stipulated settlement timeline.
7. Unaccepted shares are returned (the encumbrance is removed) from the demat account.

Tender price

Tender offer buybacks have a fixed buyback price announced in the offer document (Letter of Offer). All accepted shares receive the same buyback price regardless of when during the tender period they were submitted. Unlike open market buybacks where no investor action is needed, tender offer prices are typically at a premium of 10% to 30% above the pre-announcement market price.

Acceptance ratio and small shareholder reservation

SEBI mandates that at least 15% of the buyback size is reserved for small shareholders in tender offers. Small shareholders are those holding shares worth up to Rs 2,00,000 on the record date.

If the small shareholder category is undersubscribed, the unsubscribed portion is transferred to the general category. If oversubscribed, the acceptance ratio for small shareholders may exceed 100% (proportional allotment applies; maximum 100% of tendered shares accepted).

In large-cap buybacks where general category is heavily oversubscribed, acceptance ratios in the general category can be as low as 10% to 30%, while the small shareholder category may see 100% acceptance. Retail investors holding shares worth less than Rs 2,00,000 can participate in the more favourable small shareholder category.

Open market buyback

In open market buybacks, the company buys shares from the secondary market over a defined period. Shareholders do not need to take any specific action; they can sell shares at market prices and may indirectly benefit from the price support provided by the company’s purchases. Zerodha facilitates no special process for open market buybacks; any secondary market sale on Kite during the buyback period is handled as a regular CNC sell order.

Buyback tax treatment

Section 115QA, Buyback distribution tax (BDT)

Prior to October 2024, listed companies were liable to pay Buyback Distribution Tax (BDT) under Section 115QA at 23.296% (20% plus surcharge plus cess) on the distributed income (difference between buyback price and issue price). This tax was paid by the company, and the proceeds received by shareholders were exempt from tax in their hands under Section 10(34A).

The Finance (No. 2) Act, 2024 amended this framework effective 1 October 2024:

• Section 115QA BDT on listed company buybacks was abolished.
• Buyback proceeds received by shareholders are now taxable in the hands of shareholders as capital gains.

Post October 2024:

• The buyback price received is treated as sale consideration.
• The cost of acquisition (original purchase price) is deducted.
• The resulting gain is taxed as capital gains:
  • STCG: If shares held less than 12 months; taxed at 15% under Section 111A.
  • LTCG: If shares held 12 months or more; taxed at 10% on gains above Rs 1 lakh under Section 112A.
• STT is applicable on the buyback transaction (treated as a deemed sale on the exchange).

For shares tendered before 1 October 2024, the old exemption under Section 10(34A) applied.

Cost of acquisition for tendered shares

When computing capital gains on a buyback tender:

• The cost is the original purchase price of the tendered shares.
• The holding period is from the original purchase date to the buyback acceptance date.
• For pre-January 2018 holdings, the grandfathering rule for LTCG may apply (cost deemed as fair market value on 31 January 2018 if higher than actual cost).

Buyback arbitrage

A common strategy is to purchase shares of a company after a buyback announcement at the current market price (below the buyback price) and tender them in the buyback at the buyback price, earning the premium. The arbitrage profit equals the buyback price minus the purchase price minus transaction costs and taxes.

Risks of this strategy:

• Acceptance ratio risk: Only a portion of tendered shares may be accepted; unaccepted shares must be sold at the prevailing market price, which may have declined from the purchase price.
• Record date risk: Shares must be purchased before the record date (T+1 settlement; last purchase date is effectively the trading day before the record date).
• Price decline risk: If the company cancels or reduces the buyback size, the market price may fall sharply.

References

1. SEBI (Buy-Back of Securities) Regulations, 2018.
2. SEBI Circular SEBI/HO/CFD/DIL2/CIR/P/2016/56, Exchange-based tender offer platform.
3. Finance (No. 2) Act, 2024, Amendment to Section 115QA (abolition of BDT on listed company buybacks).
4. Income Tax Act, 1961, Sections 10(34A), 111A, 112A, 115QA (pre-amendment).
5. NSE/BSE, Tender offer platform operational guidelines.
6. CDSL, Share blocking mechanism for tender offer participations.