Open market share buybacks: Can SEBI’s new rules protect investors while aiding corporates?

The Indian regulatory landscape for corporate capital management is shifting once again. Following a SEBI board meeting on June 19, the markets regulator authorised the reintroduction of open-market share buybacks through stock exchanges, effective August 1, 2026.

This move represents a calculated policy reversal, overturning the prohibition enacted in April 2025 that had sidelined the mechanism over concerns regarding tax distortions and institutional imbalances. It is rooted in a broader fiscal realignment; the recent synchronisation of buyback taxation with capital gains in the Union Budget has effectively neutralised the primary friction point that necessitated the 2025 ban.

Rigorous safeguards

By revisiting this framework, the Securities and Exchange Board of India (SEBI) is not merely restoring a past tool, but recalibrating it with rigorous safeguards—including mandatory fund deployment and promoter lock-ins—designed to balance corporate flexibility with market integrity.

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What are the mechanics of the new framework? What are the competing advantages for firms and retail shareholders? Do the updated guardrails successfully mitigate the historic risks that have long defined the open-market buyback debate? Let's take a closer look.

What is a share buyback?

A share buyback (also known as a stock repurchase) is a corporate financial action where a company purchases its own outstanding shares from the existing shareholders, effectively reducing the total number of shares available in the open market. Instead of distributing excess cash to shareholders via dividends, the company uses its accumulated cash reserves to buy back equity, absorbing those shares back into the company.

Companies choose this route over other corporate actions for a few primary reasons:

1. Signaling undervaluation: When management believes the stock market is heavily underpricing the company's shares, a buyback serves as a strong signal to the public that "we believe our stock is worth more than it is currently trading for."

2. Improving financial ratios: By shrinking the share count, key per-share metrics automatically look better on paper. For instance, the earnings per share (EPS) increases because the same amount of net profit is now divided by fewer shares.

3. Tax efficiency: Buybacks are treated more favourably under capital gains tax laws compared to dividends, which are often heavily taxed as regular income for investors. Historically, dividends were taxed at the individual investor's income tax slab rate (which could go as high as 30-39% for high-income earners), whereas long-term capital gains (LTCG) on equity were taxed at a much lower flat rate. If a wealthy investor historically received ₹1,00,000 as a dividend, they might have paid up to ₹39,000 in taxes under their regular income slab. However, if the company gave them that same ₹1,00,000 through a buyback, it was taxed at the much lower flat LTCG rate (previously 10%, and updated to 12.5% since the 2024 Budget), creating a massive tax arbitrage that heavily favoured buybacks over dividends.

4. Optimising capital structure: It helps companies adjust their debt-to-equity ratio, making their capital structure leaner and improving metrics like return on equity (RoE).

Why SEBI stopped it last year

Following a board meeting on June 19, SEBI approved the reintroduction of open-market share buybacks through stock exchanges, effective August 1, 2026. It had phased out this route in April 2025 due to uneven tax treatment and shareholder inequality concerns. The recent alignment of buyback taxation with capital gains tax in the Union Budget has paved the way for its revival.

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The decision to stop it last year was based on the recommendations of the Keki Mistry-led Primary Market Advisory Committee (PMAC) and the SEBI board's internal assessment. Structural loopholes, investor inequality, and tax distortions were the main red flags.

The structural loopholes were a key issue for two reasons:

1) Anonymity and front-running: Since open-market buybacks happen anonymously via regular stock exchange brokers, companies could selectively time their purchases. Institutional brokers or people close to the company could figure out when the company was buying and dump their shares first.

2) Tax arbitrage exploitation: Previously, companies paid a flat buyback tax (BBT) at the corporate level, making the income entirely tax-free for all shareholders. High-net-worth individuals (HNIs) and promoters used this to pull out massive chunks of cash completely tax-free, bypassing the high dividend tax slabs.

What's changing now?

Here's a quick recap of the basic features of the reintroduced open-market buybacks:

Effective date: The new framework comes into effect on August 1, 2026.

Capped execution window: The entire buyback process must be completed within a maximum of 66 working days from the opening date.

Regular trading mechanism: Companies can repurchase shares directly through regular, daily secondary market trading without requiring a separate, dedicated buyback window.

Mandatory fund deployment: To prevent companies from announcing buybacks merely to manipulate stock sentiment without actual intent, companies must deploy at least 40% of the earmarked funds within the first half of the buyback period.

Promoter restriction & lock-in: Promoters and their associates are strictly barred from participating in the buyback. Furthermore, their existing shareholdings will remain frozen/locked in during the active buyback period.

Public float safeguard: Execution of the buyback must not breach the statutory minimum 25% public shareholding (float) requirement.

Optional merchant banker: Appointing a merchant banker for the open-market buyback process has been made optional, reducing operational friction.

Pros and cons for companies

There are distinctive advantages and disadvantages for the company as well as for the individual shareholders when the buyback is done through open market mechanism. Here's how it impacts companies:

Capital allocation flexibility: It allows companies to return surplus cash to shareholders dynamically over time rather than committing to a fixed-price tender offer.

Reduced compliance costs: Since appointing a merchant banker is now optional, corporate compliance and advisory costs are significantly lowered.

Market stabilisation: Staggered open-market purchases allow companies to support their stock price during periods of unjustified market weakness or macroeconomic volatility.

Improved financial metrics: Reducing the number of outstanding shares increases EPS and improves the RoE.

But there are some disadvantages too:

Strict deployment mandates: The rule requiring 40% of funds to be spent in the first half restricts tactical flexibility if the stock price drops heavily later in the 66-day window.

Operational restraints on promoters: Since promoter shares are frozen during the buyback, the core management lacks the flexibility to restructure corporate holding structures or raise quick capital via promoter equity dilution during those 66 days.

Pros and cons for shareholders

Here is how SEBI's new norms impact shareholders in a positive way:

Immediate liquidity: Public shareholders looking to exit or trim positions can easily sell their shares in the secondary market with the company acting as a consistent, large-scale buyer. While shareholders can always sell on the secondary market, the advantage in an open-market buyback is the price support and reduced impact cost (slippage). If a retail investor tries to sell a large volume of shares on a normal day, on the secondary market, their own selling pressure can push the stock price down, causing them to sell at a loss.

With the company acting as a massive, guaranteed buyer in the order book in an open market buyback, it creates a "price floor." This deep liquidity allows retail investors to exit larger positions quickly without crashing the stock price against themselves.

Tax fairness: Under the revised tax structure, buyback gains are treated as capital gains tax rather than dividend distribution tax (which earlier penalised non-participating shareholders through corporate-level tax deductions).

Value accretion for remaining shareholders: As the company shrinks its equity base, the intrinsic value and ownership percentage of the continuing public shareholders automatically rise.

For retail investors, too, there are some disadvantages under the new framework:

Lack of equal/proportionate acceptance: Unlike a tender offer where every shareholder gets an equal opportunity to sell a proportional slice of their shares at a premium, open-market buybacks occur at fluctuating market rates. Retail investors might miss the window or sell at lower prevailing market prices.

For instance, imagine you and an institutional investor both own shares in Company X, which announces a buyback. In a tender offer (equal opportunity), Company X says, "We will buy 10% of everyone's shares at a fixed premium price of ₹150 (when the market is ₹100)." If you own 100 shares, you are guaranteed that the company will buy 10 of your shares at ₹150. Both you and the institutional investor get the exact same proportionate deal.

However, in an open market buyback (unequal opportunity), Company X says, "We will buy shares from the stock exchange over the next 60 days at whatever the market price is."

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On Day 5, you sell your shares at the prevailing market rate of ₹102. On Day 20, the company aggressively deploys funds. An institutional investor uses high-speed algorithmic trading to detect this demand and dumps their shares at ₹115.

The takeaway here is that there is no reserved quota or fixed premium price for retail investors. Institutional investors with better market-tracking tools can corner the company's buyback orders at higher prices, leaving retail investors with no guaranteed benefit.

Potential for information asymmetry: Since purchases happen in the regular market, everyday retail investors may not know exactly when the company is buying, potentially placing them at a structural disadvantage compared to institutional algorithmic traders.

The open-market buyback is back, but the rules have changed. While companies regain a cost-effective, flexible tool to support stock prices and optimise capital, strict mandatory deployment rules and promoter lock-ins ensure that this time, retail shareholders won't be left in the dark.