SEBI Proposes Reviving Open Market Buybacks After Tax Changes

Introduction to SEBI's Proposal

The Securities and Exchange Board of India (SEBI) has initiated a proposal to reintroduce the buyback of shares through the open market via stock exchanges. This move comes nearly a year after the mechanism was discontinued on April 1, 2025, due to concerns over shareholder fairness and tax disparities. In a consultation paper released on April 2, 2026, the market regulator is seeking public feedback on this significant policy reversal, which is primarily driven by recent amendments to India's taxation framework.

The Rationale for Discontinuation in 2025

Previously, SEBI had phased out the open market buyback route due to two fundamental issues. The first was the equitable treatment of shareholders. The price-time matching system on stock exchanges often resulted in a situation where a small number of shareholders could fulfill a large portion of the buyback orders, leaving other willing participants unable to sell their shares. This created an uneven playing field. The second major concern was related to taxation. Under the old regime, the company undertaking the buyback paid a buyback tax, while the proceeds were tax-free for the participating shareholders. This created a tax advantage for those who successfully tendered their shares compared to those who did not or those who sold shares in the regular market.

The Catalyst for Change: A New Tax Framework

The primary driver behind SEBI's reconsideration is the amendment introduced in the Finance Act, 2026. Effective from April 1, 2026, the tax liability for buybacks has been shifted from the company to the shareholder. Under the new rules, any proceeds from a share buyback will be taxed as capital gains in the hands of the shareholder. This change aligns the tax treatment of selling shares in a buyback with selling them in a normal market transaction. SEBI's consultation paper notes that this revision eliminates the 'differential tax advantage' that previously existed, thereby addressing one of the core reasons for the earlier discontinuation.

Strong Support from Industry Leaders

The proposal has received vocal support from prominent market figures and industry bodies. T.V. Mohandas Pai, former CFO of Infosys, lauded the proposal as a 'fantastic move,' stating that it would empower cash-rich companies to support their stock prices and stabilize markets, especially benefiting retail investors who have seen their SIP valuations decline amid market volatility. He argued that this could help absorb selling pressure from Foreign Portfolio Investors (FPIs) and geopolitical tensions. Industry associations like the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Association of Investment Bankers of India (AIBI) also made representations to SEBI, advocating for the revival of this route. They highlighted that open market buybacks are an efficient, globally accepted mechanism for capital allocation that improves liquidity and aids in price discovery.

How Open Market Buybacks Function

An open market buyback allows a company to repurchase its own shares directly from the secondary market through a stock exchange. This is done over a specified period through a separate trading window. Unlike a tender offer where a fixed price is offered to all shareholders, open market repurchases happen at the prevailing market price. This method provides companies with the flexibility to manage their capital structure and return surplus cash to shareholders in a gradual and non-disruptive manner. The process is governed by regulations that include limits on daily purchase volumes and disclosure requirements to ensure transparency.

Comparison: Old vs. Proposed Buyback System

To clarify the key differences, the following table outlines the changes between the discontinued system and the one now being proposed.

Market Impact and Future Outlook

The reintroduction of open market buybacks is expected to provide listed companies with a crucial tool for capital management, particularly during periods of high market volatility. Analysts believe it can act as a stabilizing force by creating buying support for a stock, potentially setting a price floor and boosting investor confidence. This flexibility is seen as vital in the current economic environment, which is marked by global tensions and significant FPI outflows. By allowing companies to efficiently deploy surplus cash, the move could lead to improved earnings per share and better returns for long-term investors.

Next Steps in the Regulatory Process

SEBI has invited comments and suggestions from the public and all stakeholders on its proposal. The deadline for submitting feedback is April 23, 2026. After this consultation period, the regulator will review the input received and make a final decision on the reintroduction of the open market buyback mechanism. The final framework is expected to include robust safeguards to ensure it balances market efficiency with the protection of investor interests.