In a significant policy pivot, the Securities and Exchange Board of India (SEBI) has proposed the reintroduction of share buybacks through the open market via stock exchanges. This move comes just a year after the regulator began phasing out the practice in favor of the tender offer route.

The Policy Shift

On Wednesday, SEBI released a consultation paper suggesting that the open market route for buybacks be reinstated. Previously, SEBI had moved to abolish this method by April 2025, arguing that the “tender offer” route was more equitable as it allowed all shareholders a pro-rata opportunity to participate.

However, the regulator noted that the landscape has changed significantly due to recent shifts in India’s taxation laws.

Why the Change of Heart?

The primary reason for the proposal is the recent overhaul of the Indian taxation framework. When SEBI originally decided to phase out open market buybacks, it cited two major concerns:

  1. Tax Inequity: Under the old rules, companies paid a buyback tax, while shareholders who successfully sold their shares in the buyback were exempt. This created an unfair advantage for those who managed to participate versus those who couldn’t.
  2. Equitable Treatment: In an open market system, trades depend on “price-time matching,” meaning some shareholders could offload their entire holdings while others missed out entirely.

The New Regulatory Landscape

SEBI now believes these concerns have been mitigated by the following tax reforms:

  • Tax Neutrality: Since October 1, 2024, buyback proceeds have been treated as “deemed dividends.”
  • Capital Gains Shift: Effective April 1, 2026, under the revised Income Tax Act, buyback proceeds are taxed as capital gains in the hands of the shareholders.
  • Level Playing Field: Because shareholders now pay tax based on their actual gains (just as they would in a regular market sale), the tax-induced advantage of participating in a buyback has disappeared.

Benefits of the Proposal

  • Market Stability: Industry bodies like FICCI and AIBI argue that open market buybacks allow companies to absorb selling pressure and prevent “panic selling” during volatile periods.
  • Price Discovery: Unlike fixed-price tender offers, this method allows for continuous price discovery.
  • Liquidity: It provides a low-friction way for companies to return capital to shareholders while enhancing market liquidity.

Next Steps

SEBI has invited public feedback on this proposal. Stakeholders and the general public can submit their comments through the SEBI website until April 23, 2026. If approved, buybacks would likely be conducted through a separate trading window on stock exchanges to ensure transparency.

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