Open Market Share Buybacks May Return After Tax Overhaul

Introduction to SEBI's Proposal

The Securities and Exchange Board of India (SEBI) on April 2, 2026, issued a consultation paper proposing the reintroduction of open market share buybacks through stock exchanges. This move signals a significant potential shift in capital market regulations, reversing a decision that led to the discontinuation of this mechanism on April 1, 2025. The proposal comes in response to crucial amendments in the Income Tax Act, which have addressed long-standing concerns regarding tax equity among shareholders. If implemented, this would provide listed companies in India with an additional, flexible route for capital management and returning surplus cash to investors.

The Rationale: A Shift in Taxation

The primary catalyst for this proposal is the recent overhaul of the tax framework governing share buybacks. Effective April 1, 2026, any proceeds shareholders receive from a buyback will be taxed as capital gains. This aligns the tax treatment of buybacks with that of regular open market sales. Previously, the tax burden fell on the company undertaking the buyback, while participating shareholders received the proceeds tax-free. This created a significant disparity, as only those whose shares were accepted in the buyback benefited from the tax advantage, leaving other shareholders at a disadvantage. SEBI's paper explicitly states that this change “addresses the earlier concern of tax-induced inequity among shareholders,” making the reintroduction of the open market route a viable option once again.

Why Was the Open Market Route Discontinued?

The decision to phase out and ultimately discontinue open market buybacks by April 1, 2025, was driven by two main concerns. First, the price-time matching system inherent in stock exchange transactions often resulted in unequal opportunities for shareholders. A small number of investors could potentially fulfill a large portion of the buyback order, leaving many others unable to participate. This was seen as undermining the principle of equitable treatment. Second, the tax arbitrage, where companies paid the tax, created an unfair advantage for participating shareholders. These factors prompted SEBI to favor the tender offer route, which provides a more structured and equitable opportunity for all shareholders to participate.

Industry and Expert Reactions

The proposal has been met with strong support from various market participants. Industry bodies, including the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Association of Investment Bankers of India (AIBI), have actively advocated for the return of this mechanism. They argue that open market buybacks are an efficient, globally accepted method that allows companies to absorb selling pressure gradually, prevent panic-driven price declines, and enhance overall investor confidence. Former Infosys CFO, TV Mohandas Pai, lauded the proposal as a “fantastic move,” highlighting its potential to support markets during volatile periods and even revive the IPO market.

How Open Market Buybacks Would Function

If reintroduced, the open market mechanism would serve as an additional option alongside the existing tender offer and book-building routes. The buybacks would likely be conducted through a separate, dedicated window on the stock exchanges, similar to the previous system. SEBI has indicated that the established regulatory framework, including limits on daily purchase volumes, price bands, disclosure requirements, and escrow account norms, would continue to apply. This ensures that the process remains transparent and operates within defined safeguards. The order-driven system ensures that all public shareholders have an equal opportunity to sell their shares based on price-time priority.

Key Details of the Proposal

To provide a clear overview, the key timelines and changes associated with the proposal are summarized below.

Market Implications and Global Context

The reintroduction of open market buybacks is expected to have several positive implications for the Indian market. It provides companies with greater flexibility in deploying surplus cash and managing their capital structure, especially during periods of market volatility. This mechanism can help stabilize a company's stock price and improve key financial metrics like Earnings Per Share (EPS) through the reduction of outstanding shares. Furthermore, this method aligns India's regulatory landscape with international standards, as open market repurchases are a widely used and accepted practice in major global markets. It enhances liquidity and supports a continuous price discovery process, benefiting the market ecosystem as a whole.

Next Steps

SEBI's proposal is currently in the consultation phase. The regulator has invited comments and suggestions from the public and other stakeholders until April 23, 2026. After reviewing the feedback, SEBI will take a final decision on the matter. The final framework is expected to incorporate robust compliance mechanisms and safeguards to balance the need for market efficiency with the imperative of investor protection, ensuring a fair and transparent process for all participants.