By Rachana Baid
With buyback proceeds now taxed as capital gains in the hands of shareholders, the markets regulator has proposed reviving the open market buyback of shares through the stock exchange mechanism. This would offer shareholders a flexible exit option while improving price stability, explains Rachana Baid
What is buyback of shares? What is the process Sebi has proposed?
Buyback of shares refers to the process by which a company purchases its own shares or other specified securities from its existing shareholders. It is essentially the reverse of issuing shares instead of raising capital from shareholders, the company returns capital to them by buying back the shares at a price generally higher than the prevailing market price.
Companies can buy back their shares through three broad routes a tender offer to existing shareholders, purchase through the open market, or acquisition from odd-lot holders. Buybacks through negotiated deals, whether on or off the stock exchange, through spot transactions, or through any private arrangement, is prohibited.
The Securities and Exchange Board of India (Sebi) in its April 2026 consultation paper has proposed reviving the open market buyback of shares through the stock exchange mechanism — a route that was gradually phased out and fully discontinued from April 1, 2025.
How open market buyback compares with other methods
THE tender offer route works on a fixed-price basis, the firm announces a price upfront, and all shareholders can participate proportionately within a set timeframe. The book-building route is price-discovery driven instead of a fixed price, the company announces a price band, and shareholders bid within it.
The final buy-back price emerges from this demand-driven process. The stock exchange route is the most flexible the company places purchase orders in a dedicated exchange window, and shareholders who wish to exit simply sell through their brokers. Matching happens continuously on a price-time basis.
Since the open market buybacks allow companies to purchase shares gradually, it helps create a sustained demand in the secondary market. In times of market volatility as seen now due to the escalating war in West Asia this can improve price stability and provide a steady demand cushion.
Why was this mode discontinued earlier?
The stock exchange route was gradually phased out between 2023 and 2025 due to two fundamental concerns.
Unequal access for shareholders: Since buy and sell orders were matched on a price-time basis meaning whoever placed their order first at the right price got priority there was a possibility that the company’s entire buyback could get absorbed by just one or a handful of shareholders.
This sits uncomfortably with the principle that all shareholders should be treated equally.
Under the tax rules applicable at the time, the company not the shareholder had to pay a special buyback tax. Shareholders who sold their shares via the buyback window paid no tax on their gains.
This created an unfair divide: shareholders who got their orders matched got tax-free gains, whereas those whose orders went unmatched not only missed out on the opportunity but also the tax-free gains.
What has changed now
The primary driver for reconsideration is a shift in India’s buyback tax framework. The Income Tax Act, 2025 as amended by the Finance Act, 2026 fundamentally changed the tax treatment. Effective from April 1, 2026, buyback proceeds are taxed as capital gains in the hands of shareholders, identical to any regular share sale.
This strengthens the case for buybacks as the Sebi proposal would mean a shift toward tax neutrality and enhanced liquidity for shareholders. It would also give companies a more flexible way to deploy surplus cash in a calibrated manner as well as support stock prices.
Proposed safeguards
If revised, the quote will operate under strict guardrails. Only shareholders of frequently traded shares are eligible. Promoters and persons in control are barred from selling into the buy-back window. Orders can be placed only through a dedicated exchange window not during the pre-open session, the first 30 minutes, or the last 30 minutes of regular trading.
Purchase orders must stay within ±1% of the last traded price. No more than 25% of the average daily trading volume — computed over the preceding 10 trading days can be purchased on any single day.
Key takeaways for investors
First, since matching is on a price-time basis, participation is not guaranteed, a sell order may or may not find a match depending on timing and volume. Second, any gains will be taxed as capital gains at the applicable rate, which investors should factor into their financial planning.
If approved, this route will offer shareholders a flexible exit option, while the revised tax framework ensures a more level playing field than before.
The writer is professor and dean (Academics), National Institute of Securities Markets.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.