1. Context and Regulatory Background
The Securities and Exchange Board of India (SEBI) has issued a consultation paper dated 2 April 2026 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 under the SEBI (Buy-Back of Securities) Regulations, 2018 (“Buy-Back Regulations”). This method had earlier been phased out with effect from 1 April 2025 by amendments to Regulation 4(iv), which provided a glide path reducing the permissible size of stock-exchange buy-backs to zero by that date.
Section 68 of the Companies Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014, continues to be the primary statutory framework for buy-backs, while buy-backs in listed companies must comply with SEBI’s regulations by virtue of section 68(2)(f). The Buy-Back Regulations presently recognise three methods: (a) tender offer on a proportionate basis; and open market buy-backs through (b) book-building and (c) stock exchange, with the latter having been disabled from 1 April 2025 by a proviso.
2. Reasons for Earlier Discontinuation of Stock-Exchange Buy-Backs
2.1 Equitable treatment concerns
SEBI’s earlier decision to phase out stock-exchange buy-backs was driven significantly by concerns about equitable treatment of shareholders. Under an order-driven exchange mechanism, there was a real possibility that a company’s entire purchase order could match with sell orders placed by one or very few shareholders, while others who wished to participate might not get executed at all due to price–time priority. This was viewed as inconsistent with the principle of equitable treatment, compared with tender offers where acceptance ratios are applied on a proportionate basis.
2.2 Tax asymmetry under the old regime
A second key concern related to tax treatment under section 115QA of the Income Tax Act, 1661, under which the buy-back tax was payable by the company, and gains in the hands of participating shareholders were exempt. In a stock-exchange buy-back, some shareholders could dispose of substantial holdings tax-free if their orders matched, whereas non-executed shareholders not only missed the corporate action but also did not enjoy the same exemption. SEBI expressly characterises this as rendering the stock-exchange route “inequitable from a taxation perspective”.
2.3 Glide path to discontinuation
To address these concerns, SEBI had introduced a phased reduction of limits for stock-exchange buy-backs based on paid-up capital and free reserves, along with compressed completion timelines, culminating in a complete bar from 1 April 2025. Parallelly, the regulations mandated a separate buy-back window on nation-wide stock exchanges, as well as extensive disclosure, escrow and daily reporting obligations to bring transparency to the transitional regime.
3. Evolution of the Tax Framework and Its Regulatory Implications
3.1 Shift from company-level tax to shareholder taxation
The consultation paper links the proposal squarely to a fundamental re-design of the tax regime for buy-backs. From 1 October 2024, the Finance Bill 2024 had shifted taxation from the company to shareholders by treating the entire buy-back consideration as “deemed dividend” in the shareholders’ hands, with the cost of acquisition being treated as capital loss.
Subsequently, the Income Tax Act, 2025 as amended by the Finance Act, 2026 further rationalised this approach with effect from 1 April 2026: buy-back consideration is now taxable as capital gains in the hands of shareholders. This means that, from a tax perspective, selling shares in a buy-back resembles a normal secondary-market sale, at least for non-promoter shareholders.
3.2 Additional tax burden for promoters
The Finance Act, 2026 introduces a differentiated tax burden for promoter shareholders of listed companies, to minimise arbitrage vis-à-vis dividends. Promoter shareholders now bear capital gains tax at 12.5 per cent (LTCG) or 20 per cent (STCG), plus an additional tax component of 6.5 per cent (LTCG) or 2 per cent (STCG) for domestic companies, and 17.5 per cent (LTCG) or 10 per cent (STCG) for other promoter shareholders. A 12 per cent surcharge on this additional tax further accentuates the promoter-specific burden, whereas surcharge is inapplicable to non-promoter shareholders.
This architecture effectively aligns the tax impact of buy-back participation and ordinary market disposals for public shareholders, while making buy-backs relatively less attractive as a tax-efficient capital return route for promoters.
3.3 SEBI’s conclusion on the “tax inequity” concern
SEBI’s paper emphasises that, under the new capital-gains based regime, public shareholders are taxed on actual gains when they tender shares in a buy-back, “similar to selling the shares in the normal course on the stock exchange.” As a result, the earlier tax-induced inequity between successful and unsuccessful participants in a stock-exchange buy-back is, in SEBI’s assessment, no longer present. This is the lynchpin for reconsidering the 2025 prohibition.
4. Stakeholder Representations and Market Perspective
4.1 Industry associations – FICCI and AIBI
Industry bodies have actively lobbied for the revival of the stock-exchange route. FICCI’s representation describes stock-exchange buy-backs as an “efficient and internationally preferred mechanism” and suggests that re-introduction through a separate exchange window would be appropriate. AIBI, representing investment bankers, emphasises that this route enables companies to absorb surplus selling pressure over time, prevent panic selling, and restore confidence among retail shareholders, while enabling deployment of surplus cash at prevailing market valuations, thus enhancing earnings per share through extinguishment at relatively lower prices. Both bodies also point out that concerns about tax deprivation have become redundant in the current regime.
4.2 Media framing and market data
The accompanying market report notes that SEBI’s consultation comes against a backdrop of relatively muted buy-back activity in the past two financial years, following tax-related changes. The article explicitly links the earlier discontinuation of the stock-exchange route (effective April 1, 2025) to concerns about inequity and tax arbitrage, and highlights that from April 2026 buy-back proceeds are taxed as capital gains in shareholders’ hands, eliminating the arbitrage between those who participate in buy-backs and those who simply sell in the market.
The same report underscores the industry view that open-market buy-backs are globally prevalent and operationally efficient, enabling gradual absorption of selling pressure, supporting share prices, and improving earnings per share by extinguishing shares bought at market valuations. SEBI is reported to have clarified that the existing regulatory constraints—limits on daily purchase volumes, price bands around the last traded price, and the use of a dedicated trading window— would continue to apply if the route is revived.
5. Core Features of the Proposed Re-introduction
5.1 Methodology within the Buy-Back Regulations
SEBI proposes to re-introduce stock-exchange buy-backs as an additional method in Regulation 4(iv), alongside tender offers and book-building. The consultation paper explicitly states that the existing regulatory framework and circulars applicable to stock-exchange buy-backs—many of which were designed during the glide path period—would continue to govern the re-introduced route.
5.2 Structural safeguards and mechanics
Key structural features preserved from the current text of Chapter IV of the Buy-Back Regulations include:
- Separate dedicated window on stock exchanges with nationwide trading terminals, where the company’s identity as purchaser is visible on
- Exclusion of promoters/persons in control from selling into the stock-exchange buy-back, thereby confining participation to non-promoter public
- Order-matching mechanism only, with prohibition of “all or none” orders to avoid discriminatory
- Restrictions on daily purchases and price bands: the March 8, 2023 circular continues to limit daily purchases to 25 per cent of 10-day average daily traded value, prohibit orders in the pre-open and first/last 30 minutes of trading, and confine purchase orders within ±1 per cent of the last traded
- Minimum utilisation thresholds: at least 75 per cent of the amount earmarked for buy-back must be actually used, with a minimum of 40 per cent utilisation in the first half of the specified
- Public announcement and disclosure regime, including appointment of a merchant banker, electronic filing with SEBI and stock exchanges, website disclosures, and daily reporting of shares bought back by the company and by the
- Escrow obligations, including a 25 per cent escrow for the earmarked amount, permissible forms of security, minimum 2.5 per cent cash component, and potential forfeiture up to 2.5 per cent to SEBI’s Investor Protection and Education Fund upon non-compliance with utilisation requirements (save for specified exceptions such as inadequate sell orders or adverse price movements).
- Extinguishment timelines requiring destruction of bought-back securities within defined periods, and in any event within seven working days post expiry of the buy-back
SEBI’s consultation paper expressly envisages that re-introduced stock-exchange buy-backs would operate through this separate buy-back window mechanism already embedded in the regulations.
6. Analytical Issues and Policy Considerations
6.1 Equity and shareholder protection
The move attempts to reconcile two potentially competing objectives: ensuring equitable treatment of shareholders and allowing companies flexibility in capital management. The revised tax framework largely neutralises the earlier concern that some shareholders could exit tax-free at the company’s cost, while others, unable to participate, were disadvantaged.
However, questions remain about execution-based inequity: although all public shareholders formally have equal access to the buy-back window, actual participation is still governed by market dynamics (bid–ask spreads, intraday liquidity, and investor sophistication). SEBI seeks to mitigate this by imposing utilisation thresholds, volume caps and price-band constraints, and by insisting that promoters cannot sell into the buy-back. But unlike a proportionate tender offer, there is still no assured entitlement for any shareholder.
6.2 Market quality, price discovery and volatility
SEBI and industry submissions both emphasise that stock-exchange buy-backs can support continuous price discovery and liquidity. At the same time, an issuer acting as a persistent buyer may influence short-term price trajectories and volatility. The framework around daily volume caps and narrow price bands, along with restrictions on placing bids during potentially sensitive pre-open and closing periods, is designed to reduce the scope for undue price support or manipulation.
The media coverage emphasises the potential of such buy-backs to “absorb selling pressure gradually, support share prices, and improve earnings per share”. While this may be beneficial from a corporate finance perspective, the same features warrant close surveillance by the regulator to ensure that buy-backs do not substitute for robust fundamentals or become a tool for short-term price management.
6.3 Promoter incentives under the new tax regime
The differentiated tax treatment for promoters under the Finance Act, 2026 tilts the economic calculus. Given the additional promoter-specific tax and surcharge, and the prohibition on promoters selling into the stock-exchange buy-back window, promoters may favour dividends or selective secondary-market sales (outside the buy-back window) over participation in buy-backs. This could alter historical patterns where promoters occasionally used buy-backs as a mechanism to increase their percentage holding (by not tendering in tender offers).
For public shareholders, by contrast, the symmetry between capital-gains taxation for buy-back and normal market disposals reduces the marginal tax consideration in choosing whether to utilise the buy-back window at all. Behaviour is likely to be driven more by price and signalling effects than by tax arbitrage.
6.4 Interaction with tender-offer buy-backs
The consultation paper is minimalist in terms of explicit prioritisation between methods. It simply proposes stock-exchange buy-backs as an “additional mechanism”. In practice, issuers may prefer the flexibility of open-market buy-backs where they wish to calibrate pace and size in line with evolving market conditions, as against the more rigid design of tender offers. Tender offers, on the other hand, remain the only route that structurally guarantees proportionate access and predictable cash-out opportunities for all shareholders.
The balance SEBI is attempting to strike is evident: maintaining a more investor-protective tender-offer regime while restoring a tightly regulated open-market option, with strict utilisation and escrow conditions backed by potential forfeiture into the Investor Protection and Education Fund.
Concluding Observations
SEBI’s consultation reflects an attempt to align the buy-back framework with the overhauled tax regime, while responding to market feedback that favours globally prevalent open-market mechanisms. By restoring the stock-exchange route within a stringent regulatory architecture – separate window, promoter exclusion, utilisation thresholds, daily caps, escrow, and forfeiture – the regulator seeks to preserve investor protection objectives that motivated the original discontinuation, now in a materially different tax environment.
For listed companies, institutional investors, and minority shareholders, the eventual outcome of this consultation will influence both the menu of capital-return tools and the interplay between tax, market microstructure, and corporate governance considerations in future buy-back programmes.
