India’s markets regulator has reopened debate on a previously scrapped share buyback route, saying that changes in the tax regime may have quietly resolved the inequities that led to its withdrawal.
In a consultation paper released on Thursday, the Securities and Exchange Board of India (Sebi) proposed reintroducing open market share buybacks through stock exchanges, barely a year after phasing out the method over concerns of fairness and tax distortions.
Earlier, companies could execute buybacks through a tender offer or buy their shares through stock exchanges in the secondary market. Sebi had flagged concerns relating to taxation and equitable access to shareholders when companies bought shares in the open market.
Since trades depend on price and timing, some investors could sell all their shares in the buyback, while others who wanted to participate might miss out completely.
Sellers benefited
In addition, under the old tax system, companies paid tax on buybacks, and shareholders who sold shares in the buyback did not pay tax on their gains. This meant only those who managed to sell benefited, while others did not. Sebi felt this created inequality.
“While some shareholders could offload their entire shareholding through matching orders without paying tax, others who wanted to participate but whose offers did not match remained deprived of tax exemptions, rendering the buy-back from open market through stock exchange inequitable from a taxation perspective,” the market regulator said in its consultation paper.
The changes in taxation since 2024 have shifted the tax burden to shareholders as buyback gains are now taxed like capital gains. This means selling shares in a buyback is treated the same as selling them in the market. According to Sebi, this removes the earlier tax advantage and makes the system more balanced.
Industry groups have been asking for this method to return. The Federation of Indian Chambers of Commerce and Industry (FICCI) said open market buybacks are widely used across the world and are more flexible for companies.
The Association of Investment Bankers of India (AIBA) added that such buybacks help companies buy shares over time, which can reduce sudden selling pressure and support stock prices.