Open Market vs Tender Offer Buyback: A Board-Level Guide to Choosing the Right Route in 2026

Open Market Buyback vs. Tender Offer: Recommending the Right Route to Boards

A Category I merchant banker’s framework for advising boards on buyback route selection — how the October 2024 tax shift has changed the calculus and what the two routes now optimise for.

Under SEBI Buyback Regulations 2018 read with Section 68 of the Companies Act, an Indian company can execute a buyback through two distinct routes — through the stock exchange (Open Market Route) or by making a proportionate offer to all shareholders (Tender Offer Route). Both routes achieve capital return, but they optimise for different things. The October 2024 shift of buyback taxation from the company to the shareholder has meaningfully changed which route makes sense in which situation.

Here is how I now walk boards through the recommendation.

The two routes at a glance

• Open Market Route — the company buys back its own shares through the stock exchange over a period of up to six months. Trading is anonymous, no proportionate allocation, price fluctuates with market. Promoters cannot participate.
• Tender Offer Route — the company offers to buy a fixed number of shares at a fixed price from all shareholders on a proportionate basis. Timeline is typically two to three months. Promoters can participate. Escrow required.

Common regulatory limits (both routes)

• Aggregate buyback limit: 25% of paid-up capital and free reserves in a financial year.
• Debt-to-equity ratio post-buyback must not exceed 2:1.
• The company must not have made any default in repayment of deposits, redemption of debentures, or payment of dividend.
• One-year cooldown between two buybacks under the same route.
• Special resolution required if buyback exceeds 10% of paid-up capital and free reserves (board resolution sufficient below that threshold).

The October 2024 tax shift — why the calculus changed

Until October 2024, buyback proceeds were tax-exempt in the shareholder’s hands under the erstwhile Section 10(34A) of the Income-tax Act, 1961 — the company paid buyback distribution tax of about 23%. Post the amendment, buyback proceeds are treated as deemed dividend in the shareholder’s hands, taxable at the shareholder’s applicable slab rate under the Income-tax Act, 2025 successor provisions. The company no longer pays buyback tax at the entity level.

The economic consequences for route selection:

• High-slab individual shareholders (30% plus surcharge and cess) now bear a materially higher effective tax on buyback proceeds than under the pre-2024 regime.
• Mutual funds and certain insurance-held stakes may be exempt or taxed differently depending on their vehicle structure.
• FPIs face the DTAA rate applicable to dividend income, which for many treaties is 10 to 15%.
• Promoters (participating only in tender route) face full slab-rate taxation, materially changing the promoter-participation economics.

Route selection framework — the five decision drivers

1. Timeline urgency

If the board wants execution completed within two to three months (e.g. before year-end reporting, capital adequacy reset, or strategic transaction), Tender Offer is materially faster. Open Market can run up to six months and typically utilises 60–80% of the sanctioned amount even then.

2. Promoter participation intent

If promoters want to participate in the buyback — commonly to consolidate holding or extract capital — Tender Offer is the only route. Open Market prohibits promoter participation. Post the October 2024 tax shift, promoter participation is a materially more expensive proposition, but for succession planning and family settlement reasons it often still makes sense.

3. Price certainty

Tender Offer fixes the buyback price up front. Open Market buys at prevailing market price (up to a stated maximum), so the average buyback price depends on how the stock trades during the window. Boards that need budget certainty prefer Tender Offer; boards comfortable with market-dependent outcomes often prefer Open Market for the flexibility.

4. Tax profile of the shareholder base

This is where the October 2024 shift bites hardest. If the shareholder base skews toward high-slab individual investors (typical of retail-heavy small and mid-caps), Tender Offer creates a distributed tax burden but at least gives shareholders the choice of not tendering. Open Market allows tax-sensitive investors to simply not sell into the buyback — but reduces the company’s certainty of execution.

5. Signalling and market perception

Open Market buybacks signal ongoing confidence and support share price during the window. Tender Offer signals a one-time capital return event and typically drives an immediate re-rating. Boards focused on longer-term signalling often prefer Open Market; boards using buyback as part of a capital restructuring often prefer Tender Offer.

Recent SEBI scrutiny worth flagging

SEBI has been notably attentive in 2025–26 to buyback timing around material corporate events — earnings, acquisitions, related party transactions. Merchant bankers should insist on a clean-hands memo from the issuer before execution. The consequences of a buyback initiated in a UPSI window (Unpublished Price Sensitive Information) are severe under the Insider Trading Regulations. This is a board-level risk memo, not a filing formality.

The merchant banker’s role — both routes

• Fair price recommendation supported by valuation methodology (particularly relevant for Tender Offer).
• Escrow account setup and management (Tender Offer only).
• Letter of Offer drafting and SEBI/exchange filings.
• Public announcement and post-buyback compliance reporting to SEBI within thirty days of buyback closure.
• Coordination with the depository for extinguishment of bought-back shares.

My default recommendation framework in 2026

• If promoters need to participate and timing is tight, use Tender Offer with clear disclosure of the shareholder tax impact.
• If the objective is broad capital return with no promoter participation and moderate urgency, Open Market suits better.
• If the shareholder base is largely institutional (mutual funds, FPIs, insurance), the effective tax cost is lower and Tender Offer becomes more attractive.
• If the shareholder base is retail-heavy and tax-sensitive, Open Market gives shareholders the tender-or-not-tender choice implicitly.
• Never execute a buyback in a UPSI window regardless of route.

Closing action list for boards

• Run the tax analysis at shareholder-category level before choosing the route — not at company level.
• Verify that the debt-to-equity and one-year cooldown thresholds are met.
• Confirm that no material corporate event is scheduled during the buyback window.
• Engage the merchant banker at the board-decision stage, not after — route selection drives all subsequent structuring.

Post October 2024, buyback route selection is no longer a mechanical choice. It is a shareholder-tax and capital-signalling decision that the board must make consciously, with the merchant banker mapping the trade-offs numerically. The right route depends on who your shareholders are, what your promoters intend, and what signal you want the market to receive.