SEBI Proposes Re-introduction of Open Market Buybacks Under Revised Tax Framework:

SEBI Proposes Re-introduction of Open Market Buybacks Under Revised Tax Framework The Securities and Exchange Board of India (SEBI) has issued a consultation paper inviting stakeholders' feedback on its proposal to reintroduce buybacks of shares in the open market.

Reason for Discontinuation of the Open Market Buyback

From April 1, 2025, the practice of companies buying back shares from the open market was discontinued. This decision was taken due to concerns about fairness among shareholders and issues related to the tax structure at that time.

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Sebi further added that in open market buybacks, it was possible for a company’s entire buyback order to be matched with the sell orders of just one or a few shareholders. As a result, other shareholders who wished to participate might not get the opportunity to sell their shares. Additionally, there were concerns about unequal tax treatment. Under the previous tax rules, companies had to pay a tax on stock buybacks. However, shareholders who sold their shares during the buyback didn't have to pay taxes on any capital gains. This created an inequity in the tax system, as some shareholders who wished to participate but couldn't were denied this tax advantage.

Why does SEBI believe the buyback should be reopened?

1. Buyback Tax Shifted to Shareholders Under New Law The Finance Bill 2024 shifts the tax burden on buybacks from companies to shareholders. As per the Income Tax Act, 2025, amended by the Finance Act, 2026, under the revised framework, money received from share buybacks will now be taxed as capital gains in the hands of shareholders. Previously, companies were required to pay tax on buybacks. But now shareholders will be responsible for paying tax on the gains they earn from selling shares in a buyback. 2. Additional Tax for Promoters The Finance Act 2026 has also introduced an extra tax component for promoter shareholders. The main objective of this is to prevent tax arbitrage between buybacks and dividend distribution. 3. Regulator Addresses Market Concerns The capital market regulator has addressed earlier concerns about discontinuing buybacks through the open market under the new tax structure. "In light of the amendments in the taxation framework introduced by the Income Tax Act, the then concerns for the discontinuation of buy-back of shares or other specified securities from open market through stock exchange, i.e. tax-induced inequity among public shareholders, now stands addressed".

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4. Equal Tax Treatment SEBI recommended conducting such buybacks through a separate buyback window on stock exchanges, as permitted under existing Buyback Regulations. It further suggested reintroducing the open market buyback method. This would give companies an additional route to undertake buybacks while ensuring fair tax treatment for public shareholders. "It is proposed that the buy-back of shares or other specified securities from open market through stock exchange may be re-introduced as an additional method in terms of Regulation 4(iv) of Buy-Back Regulations. The existing framework as provided in Regulations and Circulars issued thereunder with respect to buy-back from open market through stock exchange would be applicable". For detailed information, refer to the official PDF