The Securities and Exchange Board of India, on April 2, 2026, released a consultation paper proposing the reintroduction of open market share buybacks through stock exchanges, a route that had been prohibited since 2023. The proposal follows the removal of the tax inequity under Section 115QA of the Income Tax Act that had originally prompted the ban. Public comments have been invited until April 23, 2026.
Background
SEBI prohibited the open market buyback route in 2023 after identifying a structural tax arbitrage: shareholders who tendered shares in buybacks received tax-free proceeds, while shareholders who sold on the open market faced capital gains tax. This asymmetry was considered inequitable and susceptible to manipulative practices.
The Income Tax (Amendment) Act, 2025, restructured buyback taxation effective April 1, 2026. Under the new regime, buyback proceeds are treated as capital gains in the hands of shareholders, aligning the tax treatment with open market sales. This legislative change eliminated the differential that had justified the prohibition.
Industry bodies, including the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Association of Investment Bankers of India (AIBI), subsequently made representations to SEBI arguing that open market buybacks are globally prevalent, operationally efficient, and should be restored as a capital return tool.
Key Provisions
The consultation paper proposes the following framework:
Additional method: Open market buybacks would operate as an additional route under the SEBI (Buy-Back of Securities) Regulations, 2018, alongside the existing tender offer mechanism. Companies may choose either route.
Execution mechanism: Buybacks through stock exchanges would be executed via the normal order-matching mechanism within a separate trading window, ensuring equal access to all shareholders.
Retained safeguards: The regulatory framework governing open market buybacks — including daily purchase limits, price bands, disclosure requirements, and escrow deposit obligations — would continue to apply as they existed before the 2023 prohibition.
Board resolution requirement: Companies opting for the open market route would still require board or special resolution approvals as prescribed under the Companies Act, 2013, and the Buyback Regulations.
Implications for Practitioners
The reintroduction of open market buybacks would significantly expand the capital management toolkit available to listed companies. For companies with large free floats and diverse shareholder bases, open market buybacks offer cost advantages over tender offers, which require engagement of a merchant banker and involve higher transaction costs.
Investment bankers and corporate advisors should prepare for increased buyback advisory mandates if the proposal is finalised. The operational mechanics of executing buybacks through a trading window require careful coordination between the company, its broker, and the exchanges.
Tax practitioners must also factor in the new capital gains treatment of buyback proceeds when advising shareholders on participation decisions. The removal of the tax-free advantage for tender offer buybacks fundamentally changes the economic calculus of participation.
Frequently Asked Questions
Will shareholders still receive tax-free buyback proceeds if open market buybacks are reintroduced?
No. From April 1, 2026, buyback proceeds under both the tender offer and proposed open market routes are taxable as capital gains in the hands of shareholders. The cost of acquisition is allowed as a deduction, similar to regular capital gains computation on share sales.
Can companies currently execute share buybacks only through tender offers?
Yes. Since the 2023 prohibition of the open market route, the tender offer through a letter of offer is the only permissible method. If SEBI's consultation paper is finalised, companies will again have the option to execute buybacks through stock exchanges via order-matching.