The Securities and Exchange Board of India (Sebi) has proposed bringing back the open market route for share buy-backs, a mechanism that was completely discontinued in April 2025. If implemented, this would once again enable companies to repurchase shares directly from the secondary market, along with other existing mediums such as the tender offer.
The open market route would be brought as an additional mechanism under the regulator’s Buy-Back of Securities Regulations, 2018. Public comments on the matter are to be submitted by April 23.
Legal experts said the open market route will provide a vital liquidity buffer for companies. “In an era of high global volatility, the open-market mechanism allows a company to act as a stabilizing force, without the administrative rigidity of a tender offer,” Yash Vardhan Singh, partner at Sarvaank Associates, said.
In 2025, this medium was discontinued due to certain concerns, including inequitable treatment of shareholders and implications arising from the then income tax framework.
Resolving the Tax Deadlock
Earlier, the liability to pay buy-back tax fell on companies rather than investors who offloaded their shares. There were also worries that certain investors were approaching buy-back as an option to avoid paying capital gains tax. Shareholders, who wanted to participate in a buy-back but whose offers didn’t match orders, remained deprived of such tax exemptions.
These matters were resolved through various amendments in the income tax framework from 2024. The Finance Bill 2024 shifted the buy-back taxation liability to shareholders, treating the entire buy-back consideration as ‘deemed dividend’ and cost of acquisition as ‘capital loss’. Changes were also made to the Income Tax Act 2025, where shareholders’ buy-back considerations were taxed under ‘capital gains’.
Further in the Finance Act 2026, an additional tax component was introduced to minimize tax arbitrage between buy-back and dividend distribution. “The Finance Act, 2026 brings buyback proceeds within the capital gains framework in the hands of shareholders, aligning them with a standard market exit and moving away from earlier tax-driven preferences vis-à-vis dividends,” Anjali Jain, partner at Areness Law, said.
There are several advantages of the open market route when compared to a tender offer, such as the option to buy shares at the current market price rather than at a fixed premium, gradual execution, and simpler administration.
“Such (open market) buybacks not only enhance price discovery and liquidity, but also offer more flexibility to companies in terms of timelines, pricing and overall administrative effort and costs,” Pulkit Sukhramani, partner at JSA Advocates & Solicitors, said. With taxation on shares tendered in a buy-back being treated akin to sale of shares, it was only a matter of time that the open market route was re-introduced, he added.
Strategic Flexibility
Sebi’s proposal comes after it got requests from the Federation of Indian Chambers of Commerce and Industry and the Association of Investment Bankers of India (AIBI). The Association had written to Sebi that open market buy-back would allow companies to steadily absorb surplus selling pressure over a continuous period of time, prevent panic selling and restore confidence among retail shareholders, as per the consultation paper.