A share buyback, also known as a share repurchase, is a corporate action through which a listed company purchases its own outstanding shares from existing shareholders. It is commonly used as a mechanism for returning surplus capital and improving shareholder value. Companies often undertake buybacks when they believe their shares are undervalued or when excess cash cannot be utilised efficiently for expansion or investment. In India, buybacks are regulated under Section 68 of the Companies Act, 2013 and the SEBI (Buy Back of Securities) Regulations, 2018. Listed companies may conduct buybacks through the tender offer route or the open market route. While the tender offer route involves purchasing shares from shareholders at a fixed price within a specified period, the open market route allows companies to repurchase shares directly through stock exchanges. Although the open market mechanism is widely accepted in global jurisdictions such as the United States and the United Kingdom, its implementation in India has remained a subject of regulatory concern over the years.
Why SEBI Discontinued the Open Market Route
SEBI gradually phased out the open market buyback route between 2022 and 2025 by reducing the permissible limits and eventually discontinuing it from April 1, 2025[1]. The regulator was primarily concerned with the unequal nature of participation in stock exchange based buybacks. Since orders were executed on a price and time priority basis, institutional investors and algorithmic traders enjoyed a significant advantage over retail shareholders, who were often unable to participate effectively. This raised concerns regarding fairness and equal treatment of investors in the securities market.
Another major issue was the taxation framework governing buybacks. Under the earlier regime, companies paid Buyback Distribution Tax under Section 115QA of the Income Tax Act, while shareholders receiving the proceeds were largely exempt from tax liability. This enabled promoters to receive distributions through buybacks instead of dividends and avoid higher personal taxation. Foreign investors were also adversely affected because the tax paid by the company could not be claimed as credit in their home jurisdictions, resulting in effective double taxation.
Tax Reforms and SEBI’s Reconsideration
The position changed significantly after reforms introduced through the Finance Act, 2026 and the Income Tax Act, 2025. From October 1, 2024, buyback proceeds became taxable in the hands of shareholders as deemed dividends. Subsequently, from April 1, 2026, the framework shifted further by taxing buyback proceeds as capital gains calculated on actual gains earned by shareholders. Long term holdings became taxable at 12.5 percent, while short term holdings attracted a 20 percent tax rate. Additional surcharge rates were imposed on promoter shareholders to prevent tax arbitrage.
With the tax burden shifting from companies to shareholders, SEBI observed that selling shares through a buyback had become substantially similar to selling shares in the ordinary market. As a result, the principal concerns relating to unfair tax advantages were addressed, leading to renewed discussions regarding the possible reintroduction of the open market buyback route in India.
What SEBI is proposing
On April 2, 2026, SEBI released a consultation paper proposing the reintroduction of open market buybacks through stock exchanges alongside the existing tender offer mechanism under the Buyback Regulations, 2018. After consultations with stakeholders and the Primary Market Advisory Committee, SEBI issued revised proposals on May 9, 2026.
One of the key proposals is a maximum completion period of 66 working days from the opening of the offer. SEBI rejected the suggestion of a six month timeline on the ground that prolonged buybacks lose relevance in changing market conditions. The requirement that companies utilise at least 40 percent of the buyback amount in the first half of the offer period has also been retained to prevent symbolic announcements with minimal execution.
SEBI has further proposed removing the separate trading window previously used for open market buybacks. Since buyback proceeds are now uniformly taxed as capital gains in the hands of shareholders, the need for a dedicated window no longer exists. Companies would therefore be allowed to repurchase shares directly through normal market mechanisms, bringing the Indian framework closer to international practice.
The regulator has also proposed stricter safeguards for promoter participation. Promoter and associate holdings may be frozen at the ISIN level during the buyback period, effectively preventing any transfer, trading, or pledging of such shares. Additionally, the proposal explicitly links buybacks with the Minimum Public Shareholding requirement under the LODR Regulations to ensure that companies do not unintentionally breach the 25 percent public shareholding threshold. SEBI has also retained restrictions relating to daily purchase limits, pricing norms, escrow requirements, and periodic disclosures.
Industry Response and Continuing Concerns
The proposal has received support from industry bodies such as FICCI and the Association of Investment Bankers of India, both of which highlighted the importance of open market buybacks for market stability and capital efficiency. Many companies have argued that the tender offer route is often too rigid and time consuming, whereas the open market mechanism provides flexibility during volatile market conditions.
Despite this support, certain concerns continue to remain. Open market buybacks may indirectly increase promoter shareholding percentages even when promoters themselves do not participate, potentially creating issues with the maximum permissible non-public shareholding limits. Concerns relating to price manipulation and insider trading have also been raised, particularly in situations where companies possess unpublished price sensitive information during the buyback period. Consequently, SEBI may need to strengthen surveillance and monitoring mechanisms to ensure transparency and fairness in the execution of such buybacks.
Conclusion
SEBI’s proposal to reintroduce open market buybacks reflects a balanced regulatory approach towards corporate flexibility and investor protection. After addressing earlier concerns relating to tax arbitrage and unequal participation through significant tax and governance reforms, SEBI now seeks to restore an important capital management mechanism with stronger safeguards. If implemented effectively, the proposal may contribute towards greater transparency, market efficiency, and the continued development of India’s securities market framework.
Author: Navya Saxena, Associate
Co- Author: Mandar Latpate, Intern
- SEBI | Re-introduction of Open Market Buy-Back of Shares or Other Specified Securities through Stock Exchange https://www.sebi.gov.in/reports-and-statistics/reports/apr-2026/re-introduction-of-open-market-buy-back-of-shares-or-other-specified-securities-through-stock-exchange-_100716.html
