Introduction

On 19th June, 2026, the Securities and Exchange Board of India (“SEBI”) officially permitted open market share buyback on the stock exchanges via its 214th Board Meeting. The route, which was previously discontinued and will be effective on 1st April 2025, will be reactivated from 1st August 2026, a feat accomplished in less than 14 months. This policy reversal is not a random or superficial change. It is a direct effect of a fundamental realignment of the buyback taxation mechanism in India, which was done under the Finance Act, 2026, and the Income Tax Act, 2025, wherein the tax incidence was passed on from the company to individual shareholders of the equity shares, thereby removing the primary reason for the prohibition.

This blog examines at how that prohibition works, the fiscal and structural dynamics that helped this turnaround, the regulatory dynamics of the new rules, and some of the remaining issues that the new protections may or may not solve. In particular, the blog is organized as follows: it begins with a background on why the open market buyback route was previously discontinued, then examines the tax reforms that enabled its return. The next sections analyze the key features of the revised regulatory framework and assess what unresolved weaknesses may persist. Finally, the blog compares SEBI’s approach with global practices and closes with a brief conclusion.

Why Did SEBI Abandon the Open-Market Route?

The Buyback Regulations and Section 68 of the Companies Act, 2013 (‘Companies Act’) regulate share buybacks in India. There are two main methods listed companies can use to buy back their shares: the tender offer route, where listed companies buy back shares from shareholders at a predetermined premium within a fixed window of time, and the open market route, where listed companies buy back their shares directly from the open market through stock exchanges.

Its flexibility in operation made the open market route popular among corporations as they were able to acquire shares at the market price without giving rise to an “exit opportunity” for all shareholders at the same time. This flexibility, however, created two fault lines in its structure that eventually resulted in its discontinuation.

A. Inequitable participation and institutional advantage

The open market buybacks are conducted on the exchanges by price-time priority matching. Orders will be shipped on a first-come, first-served basis at the prevailing order rates. The system, however, on the surface was neutral, but it actually introduced a structural imbalance between retail investors and institutional or algorithmic traders. HFT infrastructure can be installed by institutional players to identify the buy-side’s footprint in the order book and place sell trades before the retail investors, once again gaining access to a company’s buy-side demand at a higher price. Retail investors, who were not in the loop with the market in real time, found that they were not given a reserved quota, premium, or any structural guarantee to participate proportionately.

The Keki Mistry-led subgroup under SEBI’s Primary Market Advisory Committee (‘PMAC’) submitted its report in May 2022, which noted this as a key concern and recommended following a ‘glide path’ to completely phase out the stock exchange route by April 1, 2025. The SEBI, in turn, took this recommendation, and the route was phased out accordingly.

B. Under Section 115QA, the problem that arises is the tax arbitrage problem. Section 115QA presents the Tax Arbitrage Problem.

The second issue, and perhaps the more significant one, was the tax distortion of the previous structure. In accordance with the Income Tax Act, section 115QA, companies engaging in buybacks used to be liable to the flat corporate rate for Buyback Distribution Tax (‘BBT’). The corollary was that buyback proceeds received by shareholders were completely exempt from personal income taxes. It led to an effective tax arbitrage: promoters and high-net-worth individuals would get large cash dividends via buybacks without having to pay higher personal income tax rates on dividends. Foreign institutional investors were hit with a double whammy: the BBT paid by the company would not be recognized as a tax credit in their home countries and would be subject to double taxation on the same income to them.

The difference between the two was stark: after applying the relevant tax slab rates, the promoter’s dividend of ₹100,000 could be liable to tax at up to 39%, whereas the same dividend in the form of a buyback would remain essentially untaxed at the shareholder level. The mechanism, therefore, was more of a tax-efficient replacement for dividend distribution, which compromised the sanctity of the Indian tax structure for capital gains and dividends.

The Fiscal Trigger: Taxation Reforms as Precondition for Revival

It was not just a shift in the risk factors with which India’s securities regulator, or SEBI, calculates risks that made the open market route feasible, but also a structural change in the taxation framework that had caused the ban.

The Finance (No. 2) Act, 2024, repealed the BBT regime and started to tax the buyback proceeds as deemed dividends in the hands of the shareholders from 1 October 2024. It was a landmark, but an interim measure. The more definitive changes came in the Finance Act, 2026 (in conjunction with the Income Tax Act, 2025), which reclassified proceeds of buyback as capital gains taxed at 12.5% for long-term holding and 20% for short-term holding, calculated on net gain realized by the shareholder instead of gross proceeds of buyback. More importantly, extra surcharges were placed on the promoter shareholders to eliminate the remaining tax arbitrage.

The result of this fiscal redesign was that a buyer’s sale of shares through a buyback was, for tax purposes, almost like selling in the ordinary secondary market. The principal drawback of the open market route is that the ability to make tax-preferential distributions to certain shareholders no longer stands as a regulatory argument. This was even recognized explicitly in SEBI’s April 2, 2026, consultation paper, and the revised proposal on 9th May 2026, reiterated this regulatory stance. It was approved by the June 19, 2026, Board.

The Revised Regulatory Framework: Key Features

The buyback route is not a literal revival of the one that was in place before 2022. The suite of structural safeguards has been incorporated in the spirit of the earlier analysis by the PMAC and the deficiencies found during the glide path period by SEBI.

• The mandatory execution timeline is 66 working days.

The buyback has to be made through the stock exchange within 66 working days from the date of opening. SEBI, in its own response, has categorically declined to accept any of the recommendations for extending the timeline for repurchasing the shares and argued that the length of the time for repurchasing the shares has become irrelevant in the market due to the changing valuations, liquidity conditions, and the company’s fundamentals. This 66-day limit provides companies with operational discipline and helps to stop them from keeping an open buyback offer as a long-term price support signal without real intention to act.

Minimum deployment level: 40% in the first half

The companies have to execute a minimum of 40% of the total buyback amount during the first half of the buyback period. This safeguard is intended to stop “optical buybacks,” a “signal” of undervaluation, or to stop panic selling, but without a significant amount of repurchase activity. SEBI’s deployment obligation is front-loaded, which means that it puts an announcement with a commitment to substantive deployment.

Limitations of participation, promoter lock-in.

The promoters and their associates will not be allowed to participate in the buyback, and during the entire offer period, all the existing shares will be frozen at the ISIN level, which means shares cannot be transferred to or traded by associates or promoters for the duration of the offer period. This is a direct response of the regulators to the historical practice of using open market buybacks for extracting liquidity from the promoters. This lock-in protects insiders from taking advantage of their knowledge of the company’s buy-side by selling off the assets when the price is low and buying them up when it is high.

Public Shareholding Floor

The buyback shall not lead to a violation of the minimum public shareholding requirement of 25% as prescribed in Regulation 38 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’). This is intended to avoid the situation where companies, and in particular the highly concentrated promoter groups, unknowingly or knowingly reduce the public floating of their shares by buyback, thereby affecting the secondary market and the access to the shares.

Integration with Companies Act, 2013

The timing of the buybacks has been pegged to the minimum interval laid down in the Companies Act, 2013, to ensure the regulatory framework is aligned with the buyback and to not allow companies to make a buyback in quick succession and continue to offer price support for an indefinite period.

Residual Concerns: What the New Framework Leaves Unresolved

The new framework tackles the worst features of the previous system. But a close examination shows that some worries remain and that, though the new protections are welcome, they still may not be adequate.

Information Asymmetry is Deeply Rooted

The basic problem with any open market buyback program is that the purchases are made through normal market processes. There is no ‘real-time’ notification to retail investors telling them on a certain day when the company is actively buying shares. Institutional participants who have stronger order-book analytics and algorithmic setups can see the buy-side action of a company and front-run the order, a trend PMAC flagged in 2022. There is no new requirement to disclose daily repurchase activity, and no set proportion of repurchase volume for retail investors. Lack of a reserved quota or a mechanism based on a proportionate entitlement does not mean that retail shareholders are still not structurally disadvantaged in accessing price support due to buyback activity.

This is a real deficiency. The United States has a Rule 10b-18 under the Securities and Exchange Commission that provides ‘safe harbor’ conditions for buyback buying, such as placing limits on the volume of the buybacks and limiting trading near the close. The rules in India, which have been revised, include a minimum amount that must be locked up, but they do not specify a cap on the amount of daily volume or impose any time limit on the intraday timing of the company’s repurchase activity to limit the amount of time that sophisticated actors have to observe and potentially exploit the company’s buying and selling of its own shares.

Limitations on the extent to which companies can be flexible within their operations.

The 40% requirement for deployment during the first half of the buyback period may be justified for anti-gaming purposes, but it also creates rigidity in companies in today’s volatile market conditions. It’s a problem that can occur when a company’s share price drops heavily as the offer closes, exactly when it might need to buy even more shares to add value for the other shareholders to whom it has retained its shares. The front-loading rule can therefore result in sub-optimal capital allocation in bad times.

Likewise, the full prohibition on promoter holding during the offer period, though important to prevent insider trading, can also make it difficult for the promoter-led management teams to make valid corporate restructuring, such as the pledge of shares for operational funding during the buyback period. This limitation can be significant in companies that are family-founded.

The 66-Day Window and Market Signalling Risk

A narrow window of execution, although a valid analytical window in terms of market relevance, can be a signal for companies to start buying back shares only when retail investors are faced with severe undervaluation and/or market stress, at the moment when they have the greatest information disadvantage. The pressure of a tight deadline and the heavy front-loading requirement could indirectly focus the buyback activity at certain volatile periods of the market and thus lead to the worst price impact for the company, and the most lucrative opportunity for algorithmic buyers.

Comparative Perspective: What Global Practice Suggests

To put SEBI’s new framework in the context of regulatory practice around the world is instructive. SEC Rule 10b-18 offers companies a safe harbour to engage in open market repurchases if the transactions comply with the rule’s conditions, such as repurchases in any one session being no more than 25% of the average daily trading volume, and prohibitions against purchases at the opening and closing of trading and against crossing the bid price at the time of purchase. All of these contribute to the difficulty of sophisticated investors or traders identifying and front-running the company’s buyback program.

The United Kingdom’s Market Abuse Regulation and related guidance from the FCA place a requirement to disclose each trading day on which companies purchased shares and, for retail investors, provide timely information on buyback activity. Similar transparency requirements are in place in the EU under the Market Abuse Regulation (MAR).

India’s new framework, however, doesn’t require any daily reporting of actual trading, nor does it have a daily volume cap that is based on the average trading volume. There is no harm in having parts of the US volume cap and the UK/EU disclosure model in the framework, so that it enhances the architecture of SEBI’s framework if it aims to protect the small investor as well as provide flexibility for the companies.

Conclusion

The restoration of open market buybacks is a policy step that is well thought out for a new fiscal environment in SEBI. The tax arbitrage was the strongest argument for the prohibition, which was eliminated by the abolition of the BBT regime under section 115QA and by aligning the buyback taxation with capital gains in the Finance Act, 2026. Promoter lock-ins, mandatory deployment floors, and MPS compliance requirements of the new framework are real enhancements from the previous framework.

At least, the regulatory framework of open market buyback in India has improved as compared to 2025. The experience of the market over the past 12 months, from August 2026 to the next cycle of the PMAC review, will prove whether it is good enough or not. SEBI should create a strong post-implementation monitoring system which will track actual buyback participation rates in buyback active counters, volume pattern on a daily basis, and price impact data, etc., and should consider the reintroduction on 26 Aug 2026 as a calibrated experiment and not a settled structure.

Riding the open market route has returned. The issue was not whether the conditions for its revival were met; they were met, in fact. The issue is whether these conditions are set in a fair manner that is not harmful to retail investors. But so far, the jury is still out.