SEBI Plans Open Market Buybacks
The Securities and Exchange Board of India (SEBI) has started a consultation to reintroduce open market share buybacks through stock exchanges. This mechanism was previously stopped in April 2025. This comes after changes to India's tax rules, which will treat buyback proceeds as capital gains starting April 1, 2026. This change aims to fix tax unfairness that led to the earlier suspension, ensuring more equal tax treatment for shareholders. The proposal adds open market repurchases as another option within the current buyback framework, alongside tender offers and book-building.
New Tax Rules Align With Global Norms
The core of SEBI's proposal is the revised tax rules. These rules remove the past advantage where only shareholders whose shares were accepted in buybacks received favorable tax treatment. By taxing buyback proceeds as capital gains, SEBI aligns India with international practices where open market buybacks are a common tool. Globally, this method is praised for improving market liquidity, aiding continuous price discovery, and allowing efficient capital allocation. In the US, open market repurchases have been the main form of buyback since the 1980s, partly due to regulatory protections and tax rates favouring capital gains over dividends.
Buybacks to Stabilize Markets Amid Economic Challenges
This regulatory shift happens amid significant economic challenges. India's economy is dealing with sustained global oil price shocks, potential stagflation, widening trade deficits, and heightened geopolitical tensions, including the conflict in the Middle East. Foreign portfolio investors (FPIs) have been net sellers, causing more market volatility and pressure on indices like the Nifty 50. In this climate, industry experts see the return of open market buybacks as a key tool to absorb selling pressure, boost investor confidence, and potentially set a price floor. Madhu Kela, Founder of MK Ventures, suggests secondary buybacks can support buying interest in tough times. Mohandas Pai advocates for SEBI to reconsider these mechanisms to stabilize markets. This SEBI move can be seen as a proactive step to inject liquidity and signal corporate confidence when external factors create significant risk.
Industry Backs Revival, Cites Historical Use
Open market buybacks were stopped on April 1, 2025, due to concerns about price-time matching causing unequal participation and tax issues. However, their history in India is significant. Between 1999 and 2022, over 500 buyback announcements were for open market repurchases. The Companies Act of 2013 further simplified buyback processes, giving companies flexibility. Industry bodies like FICCI and the Association of Investment Bankers of India have publicly backed SEBI's proposal, highlighting its usefulness in absorbing selling pressure, improving market liquidity, and enabling efficient capital use. They note this method is widely used globally and helps with better price discovery.
Concerns Remain Over Buyback Misuse
Despite the potential benefits, concerns remain about possible misuse. In the past, concerns arose that companies might announce buybacks to artificially inflate share prices without committing significant capital. SEBI moved to curb this practice in 2009. The earlier stop was partly due to the risk that a few shareholders could dominate buybacks, leaving others out. While the new tax rules aim to create a level playing field, the price-time matching in open market operations still risks disadvantaging smaller investors if not managed with strict safeguards. JN Gupta, a former ED of SEBI, has warned that buybacks could harm investors buying at lower prices in today's market if not managed carefully. Also, the effectiveness of buybacks as a market stabilizer depends on companies having surplus cash and real confidence in their future, rather than using them as a short-term fix for wider economic problems.
Outlook for Buyback Program
The reintroduction of open market buybacks is expected to give listed companies a more flexible capital allocation tool. Analysts expect this could lead to more flexible strategies for returning surplus cash to shareholders, especially during market volatility. The move is viewed as a positive signal that could boost investor sentiment and potentially lessen the impact of foreign investor outflows. As SEBI seeks public comments until April 23, the final framework will likely include strong safeguards to ensure fair participation and prevent regulatory gaps, balancing market efficiency with investor protection.