Buy-Back Through Stock Exchange

The open market route — also called the stock exchange route — for share buybacks allows a company to repurchase shares through the secondary market, using its broker in the normal course of trading. Unlike the tender offer route, which is a time-bound open offer at a fixed price, the open market route gives the company flexibility to buy shares at prevailing market prices over an extended period, making it useful when management believes the stock is undervalued and wants to accumulate shares opportunistically.

SEBI's buyback regulations require the company to appoint a merchant banker and open a designated buyback account with a broker. All purchases must be made through this designated broker account, ensuring a clear audit trail. The company must announce the commencement of buyback purchases with a public announcement specifying the maximum price it will pay and the maximum number of shares it intends to repurchase.

A critical regulatory constraint is the daily purchase limit. The company cannot purchase more than twenty-five percent of the average daily trading volume in the share over the preceding ten trading days on any single day. This prevents the buyback from distorting the market price or being used to manipulate trading volumes. The regulation reflects the awareness that a company with material non-public information about its own business has an asymmetric advantage over sellers in the market, and unrestricted buyback volumes would allow it to exploit this advantage excessively.

The aggregate buyback size is subject to the same twenty-five percent of paid-up capital and free reserves cap that applies to the tender offer route. The buyback must be completed within twelve months of the board resolution approving it. If the buyback is not completed — meaning the company fails to deploy the full approved amount — within this period, the unused capacity is extinguished and a fresh board resolution is required to initiate another buyback.

From an investor's perspective, open market buybacks in India have a mixed record of execution. Companies sometimes announce buybacks as a signalling mechanism to support the share price during weakness but execute the buyback at a pace far slower than the announced size would suggest, ultimately deploying only a fraction of the approved amount. Tracking the weekly or monthly disclosures of buyback quantum made under SEBI's reporting requirements allows investors to monitor actual deployment against announced intentions.