SEBI Proposes Open Market Share Buybacks Return in 2026

Introduction: A Potential Return for Open Market Buybacks

The Securities and Exchange Board of India (SEBI) has initiated discussions on reintroducing the open market route for share buybacks. On April 2, 2026, the regulator released a consultation paper seeking public feedback on a proposal to bring back this mechanism, which was phased out effective April 1, 2025. This move comes in response to representations from industry bodies and amid market volatility, driven by a recent selloff and significant foreign investor outflows.

Why Was the Mechanism Discontinued?

The decision to phase out open market buybacks was based on two primary concerns. First, there was a risk of inequitable treatment among shareholders. The price-time matching system on stock exchanges meant that a company's entire buyback order could potentially be filled by one or a very small number of shareholders, leaving others with no opportunity to participate. This contrasted with the tender offer route, where all shareholders can participate on a proportionate basis.

The second major issue was the taxation framework. Under the previous regime, the company undertaking the buyback was liable to pay a buyback tax. Consequently, the proceeds were tax-exempt in the hands of the shareholders who sold their shares. This created a tax arbitrage opportunity, benefiting participating shareholders while offering no similar advantage to those who could not or chose not to sell. This disparity was seen as a key flaw in the system.

The Crucial Shift in Taxation

A significant change in the tax laws has prompted this regulatory reconsideration. The Finance Act, 2026, amended the taxation of buybacks, shifting the tax liability from the company to the shareholders. Effective April 1, 2026, any gains from selling shares in a buyback are taxed as capital gains in the hands of the shareholder. This aligns the tax treatment of selling shares in a buyback with selling them in the open market, thereby eliminating the previous tax-induced inequity.

SEBI noted in its paper, "Consequently, the differential tax advantage that existed earlier between shareholders who were able to participate in the buy-back and those who were not would not exist any longer." This fundamental change addresses one of the core reasons for discontinuing the mechanism.

Key Features of the Proposed Framework

To ensure fairness and transparency, SEBI has proposed that any reinstated open market buyback must be conducted through a separate, dedicated window on the stock exchanges. The execution of orders would be based on a price-time matching mechanism, which is standard for order-driven markets. This structure, according to the regulator, provides all public shareholders with an equal opportunity to participate under uniform conditions. The existing framework related to public announcements, disclosures, escrow accounts, and trading restrictions would continue to apply, ensuring regulatory oversight.

Market Context and Industry Support

The proposal comes at a time when Indian markets have faced pressure. A significant selloff in March, which saw stocks fall 11%, was fueled by record sales from foreign investors amid geopolitical uncertainty. In this context, industry bodies have advocated for the return of open market buybacks as a tool to stabilize markets.

Organizations like the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Association of Investment Bankers of India (AIBI) have made representations to SEBI. They argue that open market buybacks are an efficient, internationally preferred method that allows companies to absorb surplus selling pressure, prevent panic selling, and restore investor confidence over a sustained period.

An Internationally Accepted Practice

SEBI's consultation paper also highlights that open market buybacks are a widely used mechanism in global markets. This method is valued for its role in continuous price discovery, enhancing liquidity, and allowing for efficient capital allocation by companies. By reintroducing this route, India would align its regulatory framework more closely with international practices, providing companies with greater flexibility in their capital management strategies.

Next Steps and Public Consultation

SEBI has invited comments and suggestions from all stakeholders on its proposal. The deadline for submitting feedback is April 23, 2026. After reviewing the public comments, the regulator will take a final decision on whether to amend the SEBI (Buy-Back of Securities) Regulations, 2018, and reintroduce the mechanism. The move signals a responsive regulatory approach, adapting to changes in the legal and economic landscape.

Conclusion

The proposal to reintroduce open market share buybacks marks a significant potential shift in India's corporate finance regulations. Driven by crucial amendments to the tax framework that address past concerns of inequity, the move is supported by industry stakeholders as a necessary tool for market stability and efficient capital management. The final outcome will depend on the feedback received during the consultation period, but the proposal itself reflects a pragmatic effort to provide companies with a globally recognized mechanism to support their share price and return value to investors.