Whalesbook
Need to Reallocate Corporate Cash
India's market regulator, SEBI, has started a key consultation on reintroducing open market share buybacks, a practice stopped in April 2025. This move comes as Indian companies hold large cash reserves. For example, Reliance Industries had over ₹1.06 lakh crore in FY25, with Tata Consultancy Services and Infosys also holding significant amounts. Meanwhile, plans for private capital spending (CAPEX) in FY27 suggest a slowdown, with large companies planning fewer investments than in FY26. In this climate, buybacks offer a way to return excess cash to investors, promoting better use of funds rather than letting cash sit idle or lose value to inflation.
Stabilizing Stock Markets Amid Outflows
This rule change is especially important given ongoing foreign investor (FII) outflows. Indian stocks have faced significant selling pressure, with FIIs pulling out around ₹1.66 lakh crore in 2025 and continuing into early 2026. This has contributed to about a 9% drop in the Nifty 50 index year-to-date. Bringing back open market buybacks could provide a needed balance by creating domestic demand. This can absorb some selling pressure, boost investor confidence, and help prevent further market declines. Buybacks were previously stopped due to fairness and tax issues, but current market conditions highlight the need for tools that support liquidity and stability.
Boosting Shareholder Value and Valuations
Besides stabilizing markets, bringing back open market buybacks could help address high valuations in some parts of the Indian market. By reducing the number of shares available, buybacks automatically increase earnings per share (EPS) and can signal that management believes the company is undervalued. This method, favored by Indian firms from 2004 to 2014 before a move to tender offers, is now seen again as a flexible way to increase shareholder value. Buying shares on the open market allows for steady absorption of selling pressure and timely support for stock prices, especially when better investment opportunities are scarce.
Strict Rules for Buyback Execution
SEBI's proposal includes strict rules to prevent market manipulation, similar to international standards. Companies must adhere to daily purchase limits, set at 25% of average daily trading volume (ADTV), and buyback orders must stay within 1% of the last traded price. Additionally, buybacks cannot be done with promoters or controlling individuals, and are limited for stocks with low trading activity. These rules aim to ensure buybacks are done openly and fairly, addressing past concerns that led to their suspension in April 2025. The change in tax treatment, effective April 2026, taxing buyback gains as capital gains for shareholders, resolves the tax advantage that previously benefited buyback participants over those selling on the open market.
Risks and Criticisms of Buybacks
However, SEBI's efforts to ensure fairness do not eliminate all risks. The price and time priority system, though regulated, can still favor active traders. It may not offer the same benefits to all long-term shareholders as a tender offer, where acceptance is proportionate. Furthermore, using large cash reserves for buybacks, especially when private CAPEX is slowing, raises questions about whether this money could be better spent on future growth projects or research. This is notable as major Indian firms like Reliance Industries are investing in new energy and expansion. SEBI's shifting approach to buyback methods—from favoring open market purchases for years to stopping them and now considering them again—shows an ongoing search for the best ways to allocate capital. There are also concerns that buybacks could be used as financial maneuvers to artificially boost EPS and executive pay without truly improving how a business performs.
Market Expectations for Buybacks
Most analysts view SEBI's plan to reintroduce open market buybacks as a timely step. They believe this will give Indian companies an important tool for managing capital, improve stock liquidity, and support markets dealing with foreign outflows and weaker domestic investment. The buyback mechanism is expected to help earnings per share grow and could adjust valuations, especially if company profits remain strong. SEBI is seeking public comments until April 23, 2026. The final rules are expected to boost investor confidence and create a more flexible capital strategy for Indian companies.