SEBI Proposes Restoration of Open Market Buybacks: A Boon for Indian Investors

The world over, securities market laws look favourably upon companies buying back their own shares. Indian regulations have however flip-flopped on this issue. Since April 2025, companies have been barred from buying back shares through the open market route. However, share buybacks are necessary for the free flow of capital within the market ecosystem. Therefore, it is good to see a Securities and Exchange Board of India (SEBI) consultation paper, which proposes to bring back buybacks through the open market route.

Why Open Market Buybacks are Necessary

There were two major reasons why open market buybacks were frowned upon. One, they were seen as inequitable to shareholders. In the tender offer route, all shareholders get an opportunity to offer their shares to the company, which are then proportionately accepted. In market buybacks, only select investors who sell in the market while the buyback window is open get to participate. However, market buybacks are not as unfair as they seem. Regulations require companies to make public announcements of buyback programmes much ahead of the event, giving all shareholders the chance to participate. Buyback announcements also trigger a rerating of the stock, so they offer a good exit opportunity to all shareholders, irrespective of whether they participate in the buyback.

For more information on share buybacks and their benefits, please visit our website.

Taxation of Buybacks

Two, the taxation of buybacks as ‘deemed dividends’ from October 2024 led to tax arbitrage. Investors ended up paying high rates of tax at slab rates on shares sold to the company during the buyback, while share sales outside of this attracted lower capital gains tax. This anomaly was removed in the latest Budget, with buybacks now subject to the same capital gains tax regime as market share sales. On worries about vested interests manipulating stock prices through buybacks, SEBI regulations have checks and balances in place.

Companies cannot buy back shares from their promoters or persons in control. They cannot launch buyback offers if their shares are thinly traded. Open market buybacks can also be executed only through the exchanges, and companies cannot buy more than 25 per cent of the average trading volume of their share on any given day. Their purchase orders must also be placed within a 1 per cent range of the last traded price of the share. These rules effectively prevent vested interests from misusing market buybacks.

SEBI’s Proposal is Timely

SEBI’s proposal is timely. One, India Inc is sitting on a cash pile, with many companies reluctant to invest in capital expansion. Buybacks by such companies will allow surplus capital to flow back to investors, who may redeploy it in more productive avenues. Two, buybacks shrink companies’ equity base and lift their per share earnings. They can help correct valuation excesses in sections of India Inc. Most important, with foreign investors on a relentless selling spree and domestic institutions the only buyers, Indian equities are struggling with an over-supply problem. Corporate buybacks can absorb some of this excess and shore up investor confidence.

For more information on Indian stock market trends and analysis, please visit our website.

Conclusion

In conclusion, SEBI’s proposal to restore open market buybacks is a positive move for Indian investors. It will allow companies to buy back shares and return surplus capital to shareholders, which can help correct valuation excesses and shore up investor confidence. We will continue to monitor the situation and provide updates on our website. For more information on share market news and analysis, please visit our website.