Concerns settled, share buybacks could flow via exchanges again

The Securities and Exchange Board of India (Sebi) has proposed reintroducing share buybacks through the stock exchange route, reversing a decision taken a year ago after changes in tax rules removed earlier concerns over fairness and arbitrage.

The regulator said the revised taxation framework has addressed issues of unequal shareholder participation and tax distortions that had led to the discontinuation of the route.Sebi had phased out the stock exchange route in a staggered manner, eliminating it completely from April 1, 2025. At the time, it had flagged that the price-time matching mechanism could allow a few shareholders to corner buyback benefits, leaving others without participation. Additionally, under the earlier tax regime, companies bore the buyback tax while shareholders paid none, leading to uneven outcomes.

“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,” Sebi said in a consultation paper on Thursday.

Under the new buyback taxation framework, public shareholders will be taxed on their actual capital gains when shares are tendered in a buyback, similar to a normal market sale. “Consequently, the differential tax advantage that existed earlier between shareholders who were able to participate in the buy-back and those who were not, would not exist any longer,” Sebi said.

Buybacks through the stock exchange are conducted via an order-driven mechanism, where execution is determined by price-time matching and all public shareholders have an equal opportunity to participate under uniform conditions. The shift in tax liability — from companies to participating shareholders — has effectively aligned buyback transactions with normal market trades, the regulator said, while seeking public comments by April 23.

The proposed framework retains existing safeguards, including a separate buyback window on exchanges, limits on price and volume, restrictions on promoter participation, and enhanced disclosure requirements.