SEBI Proposes Reintroducing Open Market Share Buyback via Stock Exchanges

The Securities and Exchange Board of India has released a consultation paper proposing the reintroduction of open market share buybacks through stock exchanges. The paper, published on April 2, 2026, invites public comments until April 23, 2026. This move follows the discontinuation of the open market buyback route from April 1, 2025, which was prompted by concerns over unequal shareholder participation and tax-induced inequity. With the taxation framework for buybacks having been fundamentally reformed under the new Income Tax Act, SEBI believes the conditions that originally justified the suspension no longer apply.

Why Open Market Buybacks Were Suspended

Under the previous regime, buyback proceeds were taxed as dividend income in the hands of the company, not the shareholder. This created a situation where shareholders who tendered their shares in an open market buyback received consideration that was functionally different from a regular sale on the exchange, even though both were market transactions. The tax treatment created an inequity: shareholders who participated in the buyback bore a different tax incidence compared to those who simply sold shares in the open market. SEBI, acting on these concerns, discontinued the open market route effective April 1, 2025, retaining only the tender offer mechanism.

The Tax Reform That Changed the Equation

The Finance Act 2024, effective from October 1, 2024, fundamentally changed the taxation of buyback proceeds. Under the new framework, buyback consideration received by shareholders is now taxed as capital gains in the hands of the shareholder. This eliminates the differential tax treatment between shareholders who participate in a buyback and those who sell shares in the open market. From a tax perspective, selling shares in a buyback is now functionally identical to a normal market transaction. The cost of acquisition is available as a deduction against the buyback consideration, and the resulting gain or loss is treated like any other capital gain on listed securities.

SEBI's consultation paper acknowledges that this tax reform directly addresses the concern that originally led to the suspension of open market buybacks. With tax parity now established between buyback participation and regular market sales, the primary objection to the open market route has been resolved.

Proposed Safeguards for the Revived Route

SEBI has indicated that if the open market buyback route is reintroduced, the earlier regulatory framework governing such buybacks would continue to apply. This includes limits on daily purchase quantities, price bands to prevent market manipulation, mandatory disclosure requirements at each stage of the buyback, and the use of a separate trading window on the stock exchange. These safeguards were part of the original SEBI (Buy-Back of Securities) Regulations and are designed to ensure transparency and equal treatment of all shareholders during the buyback period.

The proposal also comes in response to representations from industry bodies including the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Association of Investment Bankers of India (AIBI), which argued that open market buybacks are globally prevalent and operationally efficient. Companies have consistently preferred the open market route because it allows buybacks to be executed gradually over a period without requiring a formal tender offer, reducing transaction costs and administrative complexity.

Impact on Listed Companies and Shareholders

If adopted, the reintroduction of open market buybacks will give listed companies an additional mechanism to return capital to shareholders. Currently, companies can only conduct buybacks through the tender offer route, which requires a formal offer to all shareholders at a fixed price. The open market route, by contrast, allows companies to purchase shares from the secondary market over a defined period, giving management greater flexibility in timing and execution. For shareholders, the revived route means that anyone holding shares of a company conducting an open market buyback can sell their shares on the exchange during the buyback window without needing to tender them separately.

From a market structure perspective, the open market buyback mechanism also provides price support during the buyback window, as the company acts as a consistent buyer. This can be particularly relevant during periods of market volatility, where companies with strong cash positions may wish to signal confidence in their own valuation.

Practical Takeaways

Listed companies considering buybacks should monitor the outcome of this consultation closely, as the revival of the open market route will significantly expand their options for capital return. Company secretaries and compliance officers should review the existing buyback regulations to prepare for a potential dual-route framework. Shareholders and investors should understand that the tax treatment of buyback proceeds is now aligned with regular capital gains, meaning that participation in an open market buyback will have the same tax consequences as selling shares on the exchange. The consultation paper is open for public comments until April 23, 2026, and stakeholders with views on the proposal should submit their feedback to SEBI before the deadline.