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Buyback & Open Offer

In case of both buybacks & open offers, the shareholders are offered an option to sell their shares…

What is the difference between a buyback and an open offer?-Rakesh Ojha

In both cases, shareholders are offered an option to sell their shares. In case of a buyback, it is the company that offers to buy shares from the open market. Investment banks are entrusted with the job. They buy the shares at existing prices and later nullify them. Post buyback the outstanding number of shares of a company decreases.
Many companies favour this method of transferring cash to investors, as in case of dividend payment dividend distribution tax has to be paid. Buybacks are also used by promoters as a tool to cement their stake in the company. If they do not sell their shares, their shareholding as a percentage of outstanding shares goes up.
Open offers are generally offered by an acquiring company to shareholders of a company that is being acquired. This allows the latter to get the necessary shareholding for completing its acquisition. Shareholders are given the choice to tender their shares. Unlike a buyback here the shares just change hands but are not nullified.
A crucial difference between the two in India is in tax treatment. Long-term capital gains tax is nil if securities transaction tax (STT) has been paid when shares exchange hands. Since an open offer transaction is an off-market transaction, no STT is paid on it. Such a transaction is not exempt from long-term capital gains tax. The gains are taxed at 10 per cent without indexation or 20 per cent with indexation.



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