This paper examines the excess returns on the announcement of share buybacks by Corporate India. The study finds significant announcement day Average Abnormal Return (AAR) of 2.77% and Cumulative Abnormal Return (CAR) of 7.91% for a sample of 70 announcements for the period 1999-2007. The overall CAR is 7.24% for a 41-day window. The fall in CAR in the post-offer period suggests that all positive returns are realized in the pre-offer period only. This result contradicts the prediction of signaling hypothesis. The fixed price tender offers yield higher announcement returns than open market repurchases in the Indian context.

Studies on share buybacks have gained importance in the wake of increased dependence on buybacks by companies in returning free cash flow (Lamba and Ramsay, 2000). The research studies in the US show that companies substitute repurchases for regular dividend payments. Grullon and Michaely (2002), after analyzing substitution effect of buybacks, find evidence in support of this. The total amount of funds distributed through share repurchases increased substantially in the US from $1.4 bn in 1980 to $215 bn in 1998 (Grullon and Ikenberry, 2000). In 1999 and 2000, industrial firms in the US spent more money on share repurchases than on dividend payments (Grullon and Michaely, 2002). According to Rau and Stouraitis (2006), there was a total distribution of $232 bn in 2004 by the US companies on share repurchases. Not only in the US, even in European countries and Australia, the share repurchases have become popular.

Share buybacks are relatively a recent phenomenon in India. It was allowed in 1998 through an amendment of Companies Act, 1956. In Europe and within the EU member nations, several countries removed restrictions on share repurchases in the 1990s. For instance, Denmark abolished restrictions in 1995; Finland and Poland in 1997, and Germany and France in 1998. In 1999, Norway removed the restrictions on share repurchases. Similarly, restrictions have been abolished in other parts of the world: Australia, 1989; Hong Kong, 1991; Korea, 1994; and Japan, 1995 (Ridder, 2006). In India, share buybacks were allowed as a level playing field to corporate India in October, 1998. Three new Sections, viz., 77A, 77B and 77AA, were inserted in the Companies Act, 1956, and the Securities and Exchange Board of India (SEBI) issued regulations in 1999 to be complied by the listed companies. There were as many as 140 announcements made between 1998 and 2007 (SEBI's status report on buyback, 2007).

Applied Finance Journal, Average Abnormal Return, AAR, Cumulative Abnormal Return, CAR, Securities and Exchange Board of India, SEBI, capital structure, abnormal returns, Standardized Abnormal Returns, SAR, Fixed Price Tender Offers, FPTs, Open Market Repurchases, OMRs, Centre for Monitoring Indian Economy, CMIE .