The Securities and Exchange Board of India (“SEBI”) has issued a consultation paper titled ‘Re-introduction of Open Market Buy-Back of Shares or Other Specified Securities through Stock Exchange’, dated April 02, 2026 (“Consultation Paper”), proposing the re-introduction of buy-back of shares or other specified securities from the open market through the stock exchange as an additional method in terms of Regulation 4(iv) of the SEBI (Buy-Back of Securities) Regulations, 2018 (“Buy-Back Regulations”).
Background
Historically, Regulation 4(iv) of the Buy-Back Regulations permitted buy-back through: (a) a tender offer from existing shareholders or other specified securities holders on a proportionate basis; and (b) from the open market through book-building process or stock exchange.
The open market method for buy-back of shares (or other specified securities) through stock exchange was, however, discontinued with effect from April 01, 2025, pursuant to a phased glide path which progressively reduced the maximum permissible size of such buy-backs from 15% of paid-up capital and free reserves (till March 31, 2023), to 10% (from April 01, 2023), to 5% (from April 01, 2024), to nil (from April 01, 2025).
The discontinuation was premised on: (i) the price-time order matching mechanism creating a risk that certain shareholders would be deprived of participation, contrary to the principle of equitable treatment; and (ii) the erstwhile tax framework under Section 115QA of the Income Tax Act, 1961, which placed buy-back tax on the company with no shareholder-level liability, thereby creating an inequitable tax advantage for shareholders who successfully participated over those who could not.
Proposal
SEBI, through the Consultation Paper, has proposed to re-introduce open market buy-back through the stock exchange as an additional method under Regulation 4(iv) of the Buy-Back Regulations. The basis for the re-introduction is the fundamental change in the taxation of buy-back proceeds. The Income Tax Act, 2025 as amended by the Finance Act, 2026 (“Income Tax Act”), effective April 01, 2026, provides that buy-back consideration is taxable as “Capital Gains” in the hands of shareholders.
Accordingly, the tax treatment of buy-back is now aligned with the taxation applicable to sale of shares on the secondary market, thereby eliminating the differential tax advantage that previously accrued to shareholders who were able to participate in the buy-back. As a result, the earlier concern of tax-driven inequity between participating and non-participating shareholders stands substantially addressed.
The Finance Act, 2026 additionally imposes an incremental tax on promoter shareholders of listed companies to minimize tax arbitrage between buy-back and dividend distribution. While non-promoter shareholders are liable only to capital gains tax at applicable rates, promoter shareholders are subject to capital gains tax (LTCG at 12.5% / STCG at 20%) along with an additional tax at 9.5% of LTCG / 2% of STCG for domestic companies, and at 17.5% of LTCG / 10% of STCG for others, accompanied by a 12% surcharge on such additional tax under Section 3(6) of the Finance Act, 2026.
Upon re-introduction, the existing framework under Chapter IV of the Buy-Back Regulations and the SEBI Circular dated March 08, 2023 would apply, including:
(i) a separate buy-back window at the stock exchange restricted to frequently traded shares;
(ii) exclusion of promoters and persons in control from the buy-back;
(iii) execution of buy-back through the order matching mechanism (excluding the ‘all or none’ system);
(iv) a purchase cap of 25% of the average daily trading volume (in value terms) computed over the preceding 10 trading days, with no bids permitted during the pre-open session or the first and last 30 minutes of the regular trading session, and a purchase price restricted to within ±1% of the last traded price;
(v) a utilization obligation of at least 75% of the earmarked amount (with 40% within the first half of the specified duration);
(vi) an escrow account equivalent to 25% of the earmarked amount to be created within two working days of the public announcement;
(vii) a public announcement to be made within two working days of the board/special resolution, filed simultaneously with SEBI and the relevant stock exchanges (no letter of offer required);
(viii) daily disclosure of securities bought back to the stock exchange and on the company's website; and
(ix) extinguishment of all bought-back securities within seven working days of expiry of the buy-back period.
Our View
SEBI’s proposal of re-introduction of buy-back of shares or other specified securities from the open market through the stock exchange, if implemented, would provide listed companies with an additional mechanism for returning surplus capital to non-promoter shareholders, alongside the existing tender offer route. Since buy-back consideration is now taxed identically to a normal market sale, a shareholder who does not participate in the buy-back no longer suffers any differential tax disadvantage.
Two aspects, however, merit particular attention. First, the Consultation Paper does not specify a revised maximum size limit for buy-backs undertaken through the stock exchange route, leaving open the question of the applicable threshold post re-introduction. Second, the interaction between the buy-back window and trading window restrictions under the SEBI (Prohibition of Insider Trading) Regulations, 2015 may require further operational clarity, which SEBI is expected to address through subsequent guidance.
Stakeholders have until April 23, 2026 to provide feedback on this proposal.
