The Governance Shift in India’s Buyback Tax

The Union Budget for 2026-27 marks a fundamental shift in how buybacks operate in promoter-dominated markets. The policy frames buybacks as governance-sensitive transactions, with outcomes shaped by ownership structure and control.

Since 2025, tender offers are the only permitted mechanism.

Once the method is fixed, governance instruments can ensure procedural fairness but cannot distinguish economic roles within the transaction. Tax therefore becomes the only instrument that operates automatically at the time of buyback settlement. It produces distinct outcomes after participation has occurred without reliance on discretion or intent.

Asymmetrical Outcomes
In concentrated ownership structures, buybacks can produce materially different outcomes for different shareholders.

SEBI’s regulatory framework explicitly classifies promoters based on control, influence, and disclosure obligations, providing a regulatory mechanism to identify control shareholders. Shareholding disclosures and buyback participation records allow tax authorities to apply differentiated tax rates.

Control shareholders influence initiation, size, pricing, and timing, while retaining discretion over participation. Such discretion allows conversion of corporate surplus into liquidity under conditions control holders shape. Control shareholders are price-setters.

Portfolio shareholders do not decide whether a buyback occurs, how it is structured, or when it is launched. Without any influence, they respond to the announced terms seeking liquidity and return on capital. They are price-takers

Tender offers ensure proportional participation but do not remove promoter control over timing and participation.

Splitting Shareholder Monolith
The Budget departs from the earlier assumption that all shareholders constitute a single homogeneous class. Shareholders are now segmented by economic role, not by legal and residential identity. Portfolio capital and control capital are treated as distinct classes. Tax rates align with economic roles.

Tax Differential
Rate differentiation addresses asymmetry in both economic roles and buyback outcomes.

Portfolio shareholders are taxed under capital gains rules at 12.5% for long-term holdings and 20% for short-term holdings. The Budget restores capital gains tax logic for non-promoters by permitting deduction of acquisition cost before taxation, correcting the anomaly introduced earlier in October 2024.

Control shareholders face significantly higher tax rates. Domestic corporate promoters attract rate of 22%, while non-corporate and foreign control holders face rate of 30%.

Portfolio shareholders are taxed on net economic gain. Control shareholders, as price setters with discretion over participation, face a tax rate that mirrors dividend-like extraction. Different economic roles are subject to different tax rates.

Governance Glide Path
Global buyback practice aligns along a governance continuum. An initial phase reflects promoter-dominated ownership with elevated control risk. A subsequent phase emerges as boards strengthen and institutional oversight deepens. A mature phase has dispersed ownership, with governance institutions ensuring neutrality.

In the US, ownership dispersion and securities law constrain insider participation. Companies like Apple execute buybacks as continuous balance sheet actions not as liquidity-driven events. The UK and Europe rely on governance institutions and disclosure requirements to limit selective participation. Firms like Unilever rely on open market buybacks governed by regulatory oversight and transparency requirements. Japan offers a relevant comparison shaped by governance reforms. Companies like Toyota operate within frameworks emphasising capital efficiency.

From an early phase, India is progressing toward the intermediate stage. Concentrated ownership combined with mandatory tender-route execution limits the effectiveness of governance alone. Differentiated tax rates operate as an incentive correction, reducing the attractiveness of promoter-led exits while preserving buybacks as a capital allocation tool for portfolio shareholders.

Trade Offs
The framework may render buybacks inefficient in certain scenarios.

Tax policy does not distinguish between promoters seeking exits and promoters executing buybacks for genuine balance sheet optimisation. Legitimate capital allocation decisions facing the same tax treatment as extraction-oriented transactions cause efficiency cost.

In group structures, promoter holding companies may receive buyback proceeds. Subsequent distribution of the same funds to individual promoters can result in multiple layers of taxation and additional efficiency costs.

The policy accepts these efficiency costs as a necessary trade-off to address control risk in the current market structure.

Buybacks continue, with economic purpose and beneficiary specified explicitly.