When a company has enough cash in books but doesn’t see any good investment opportunity or new venture or if there is a scenario when the share price of the company is undervalued so the company then purchases some proportion of its shares from the existing shareholders.

This purchasing of its own shares from the shareholders is known as buyback of shares.

Even for the purpose of tax, the company may choose for buyback of share option as this option is more tax-effective than paying a dividend.

Promoters increase their shareholding in the company by way of buyback of shares as these shares are removed from the Equity shares of the company.