SEBI Reopens Buyback Route, but Markets May Barely Use It

The Securities and Exchange Board of India has floated a consultation paper proposing the reintroduction of open-market buybacks through stock exchanges, a mechanism that the regulator itself discontinued on April 1, 2025, citing inequitable access for shareholders and a structural tax asymmetry that allowed some sellers to exit tax-free while others were shut out. Both concerns have now been addressed, SEBI says. 

The Finance Ministry attempted to address this by rewriting tax laws three times in under three years, with each rewrite creating a new distortion that the previous one failed to anticipate. The sequence is straightforward. Until September 2024, companies paid a flat buyback distribution tax at 20% under Section 115QA, with shareholders receiving proceeds entirely tax-free.

The Finance Act 2024 abolished that, replacing it with a deemed dividend framework that taxed the entire buyback consideration as income from other sources rather than capital gains. That triggered its own distortion, as shareholders suddenly faced tax on gross receipts with no ability to set off capital loss from extinguished shares, since these fell under a different tax schedule.

The Finance Act 2026 corrected that error, reclassifying buyback proceeds as capital gains from April 1, 2026, a treatment that tax professionals have advocated since 2013. 

SEBI's reintroduction proposal, two days after the new tax year began, is not a fresh regulatory initiative but an instance of regulatory sequencing.

What the Finance Act 2026 added on top of the capital gains restoration is a promoter-specific structure that creates conflicting incentives.

SEBI's regulations bar promoters from participating in open-market buybacks altogether. They cannot sell into the company's exchange window. But the Finance Act 2026 imposes an additional levy on promoter shareholders who participate in buybacks: the effective tax rate for a domestic promoter entity on such gains is 22%, compared with 12.5% for public shareholders. 

The stated rationale, as clarified by the Income Tax Department, is to prevent promoters from using buybacks as a low-tax route for cash extraction. Since promoters cannot participate in open-market buybacks, the higher tax applies only to tender offers. 

The Finance Act, intentionally or otherwise, has made tender offers materially more expensive for promoters while SEBI simultaneously reopens the route that excludes them. 

The Federation of Indian Chambers of Commerce and Industry and the Association of Investment Bankers of India argue that open-market buybacks allow companies to absorb sustained selling pressure and deploy surplus cash at prevailing prices, rather than at a fixed tender price negotiated weeks in advance. 

This mechanism functions in calm, rational markets. The proposed framework limits companies to buying no more than 25% of the average daily trading volume over the preceding 10 sessions, within a price band of ±1% of the last traded price, excluding the first and last 30 minutes of each session. In a falling market, when absorbing selling pressure matters most, a stock moving more than 1% intraday effectively shuts the company out of the market for much of the session, limiting its ability to execute buybacks.

If the current structure holds, open-market buybacks will remain a tool for cash-rich, mid-sized companies with modest promoter holdings and stable share prices, rather than the capital-return instrument that FICCI envisioned.

Tender offers, despite the promoter tax liability, will continue to dominate because they guarantee execution at a fixed price. SEBI will have reintroduced the mechanism but achieved only cosmetic diversification of the buyback toolkit. 

Promoters who drive capital allocation in most listed Indian companies will continue to route surplus cash through dividends or tender offers. The open-market window will remain largely decorative.