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SEBI Plans to Reintroduce Open Market Buybacks
India's market regulator, SEBI, plans to bring back open market share buybacks via stock exchanges. This marks a major regulatory shift, driven by a new tax approach for buyback proceeds starting April 1, 2026. Instead of companies paying a distribution tax, buybacks will now be taxed as capital gains for shareholders. SEBI aims for this to create tax fairness between dividends and buybacks, resolving earlier issues with shareholder treatment.
New Rules Aim for Fairer, Faster Buybacks
Alongside the revival, SEBI is introducing much stricter rules for execution. Companies must now finish buyback offers within 66 working days of opening. A key requirement is that at least 40% of the buyback amount must be used in the first half of this period, stopping companies from making announcements without committing funds. Additional safeguards include freezing promoter shares at the ISIN level for the buyback's duration to prevent insider trading. SEBI is also removing the need for a separate trading window, allowing trades to happen normally on the stock exchange. These steps aim to boost transparency, speed up buybacks, and give retail investors a fairer chance, aligning with international standards.
Why Buybacks Were Stopped and Their Global Role
The open market route was paused on April 1, 2025. The reason was that its 'price-time matching' system often let quick-acting shareholders grab most of the buyback shares, leaving retail investors out. The company-level tax structure also created an uneven playing field. This led to a shift towards the 'tender offer' route, causing a significant drop in overall buyback activity. Globally, open market buybacks are common in markets like the US and UK, used for price discovery, improving liquidity, and efficient capital use. Industry groups like FICCI have pushed for its return, arguing it can help absorb selling pressure and support investor confidence, especially with foreign investors pulling money from Indian stocks.
How New Taxes Affect Shareholders and Promoters
The main driver for SEBI's proposal is the Finance Act of 2026, with changes taking effect April 1, 2026. This amendment shifts the tax burden from the company to the shareholder, treating buyback income as capital gains instead of deemed dividends. For retail and long-term investors, this is often more tax-efficient, with long-term capital gains taxed at 12.5%. However, promoters face different rates: around 22% for corporate promoters and about 30% for non-corporate promoters, intended to stop tax avoidance. This new structure removes the previous tax advantage for shareholders in buybacks, a key reason the route was previously halted.
Potential Challenges and Promoter Hesitation
However, challenges persist. The strict 66-working-day limit for completing open market buybacks, while aiming for quick action, could restrict companies that prefer a longer, more flexible timeline to deploy capital based on market conditions. Additionally, the varied tax rates, while good for retail investors, might make promoters less keen, as buybacks were previously more tax-friendly for them than dividends or other payouts. Some experts believe promoters might still prefer the tender offer route due to its guaranteed prices and straightforward exit. Historical data shows open market buybacks dropped significantly after 2012-13, with a shift to tender offers, indicating a preference for more structured exits.
What to Expect Next
Bringing back open market buybacks alongside a fairer tax system shows SEBI adapting to market needs and investor demands. The actual impact will depend on how companies respond to the shorter deadlines and new tax incentives. However, the change is anticipated to support market stability, boost liquidity, and lead to better capital allocation. This development reflects a wider move towards more equitable and transparent corporate actions, bringing India's practices in line with international norms.