Whalesbook
Accelerating the Buyback Process
India's Securities and Exchange Board of India (SEBI) is proposing significant changes to its share buyback rules. Key proposals include reintroducing open market share repurchases through stock exchanges. This method was previously phased out by April 1, 2025, over fairness and tax issues. SEBI aims to drastically cut execution timelines to a maximum of 66 working days from the offer's start, a big drop from the previous six-month period. To avoid 'announce now, buy later' delays, companies must commit at least 40% of the buyback funds within the first half of the offer period. These faster timelines aim to make buybacks a more effective tool in changing market conditions.
Merchant Bankers: Optional Role
To promote ease of business, SEBI is considering removing the mandatory requirement for merchant bankers in buyback operations. This shift could place more responsibility for disclosures, escrow, and execution onto companies themselves, stock exchanges, and secretarial auditors. While streamlining processes, this might reduce the independent oversight from merchant bankers, who previously handled crucial due diligence and compliance. SEBI also proposed freezing promoter and associate shares by ISIN during buybacks to prevent manipulation, with exceptions for tender offers. These rules, along with preventing buybacks from violating minimum public shareholding, aim to balance corporate flexibility with market integrity.
Context: Tax Reforms and Global Norms
SEBI's renewed focus on open market buybacks comes after a year-long pause due to concerns about fair shareholder participation and tax issues. Previously, companies paid buyback tax while shareholders did not, creating an imbalance. The Finance Act, 2026, now taxes buyback gains as capital gains for shareholders, resolving this. This change aligns buybacks more closely with standard market transactions. Historically, tender offers were favored for clearer prices and retail investor quotas, while open market buybacks were seen as benefiting companies more. International markets use various buyback methods. For example, the US's Rule 10b-18 offers a safe harbor based on timing, volume, and price, unlike some nations with stricter repurchase limits.
Risks: Balancing Efficiency and Fairness
However, despite the goals of efficiency and market responsiveness, potential risks remain. Less reliance on intermediaries like merchant bankers might reduce due diligence, raising the risk of inadequate valuations or rushed company decisions. Although tax changes aim for fairness, open market buybacks using price-time matching could still allow some shareholders to benefit more than others, leaving some unable to participate fully. Additionally, aggressive buybacks not aligned with a company's true value can be a poor use of capital. Industry groups back open market buybacks for flexibility, but critics warn unchecked repurchases could lead to valuation risks and wasted spending.
Public Comment and Industry Views
SEBI is seeking public comments on these proposals until May 29, 2026, allowing for further refinement before implementation. Groups like FICCI and the Association of Investment Bankers of India support the proposals, emphasizing the need for international-standard flexibility. The change in buyback taxation is a key factor making the process more appealing, especially for sectors like IT and Pharmaceuticals with strong cash flows. Success will depend on SEBI balancing faster execution with strong oversight and true shareholder equity.