India reintroduces stock exchange buybacks as tax law shift restores flexibility

India’s market regulator has renewed open-market buyback options through stock exchanges, driven by recent tax law changes that eliminate previous fairness concerns, with new controls to safeguard investor interests.

India’s market regulator has brought back open-market buybacks through stock exchanges, but the move is less a reversal of principle than a response to changed tax law. The Securities and Exchange Board of India had phased out the route in stages and ended it in April 2025, only to reinstate it from 1 August 2026 after amendments notified in July. According to the analysis published on IndiaCorpLaw, the key point is that SEBI did not abandon its earlier concerns about fairness; instead, Parliament altered the tax backdrop that had helped drive the original phase-out.

The earlier retreat from the exchange route was rooted in two objections. First, buybacks executed through the stock exchange rewarded speed and market proximity, not equal participation, because orders were filled according to price-time priority. That meant some shareholders, particularly those with faster access to trading systems, could capture the premium while others received nothing. Second, the tax treatment created distortions between those who tendered into a buyback and those who sold in the regular market. Business Standard and other reports said SEBI’s reinstatement was intended to restore flexibility while addressing those earlier investor-protection concerns.

The decisive change came from the tax side. Under the revised framework, buyback proceeds are now treated as capital gains in shareholders’ hands, rather than as a separate distribution tax borne by the company, bringing the economics closer to an ordinary sale. IndiaCorpLaw notes that this removes the tax advantage that once justified the regulator’s objection to the exchange route. The piece also points out that the Finance Act, 2026, added a higher tax burden for promoters and other controlling shareholders, reducing the risk that buybacks become a substitute for dividends with a lighter tax bill.

Even with the route restored, SEBI has not returned to the old model without restraints. LiveLaw Biz reported that exchange-route buybacks are capped at less than 15% of a company’s paid-up capital and free reserves, measured on a standalone or consolidated basis, whichever is lower. The buyback must be completed within 66 working days, with at least 40% of the earmarked funds used in the first half of the period. The revised rules also bar buybacks that would breach minimum public shareholding norms and require a public announcement within two working days of board approval, followed by notice to shareholders within one working day.

Perhaps the clearest sign that SEBI still sees the exchange route as potentially problematic is the treatment of promoters. According to the amended regulations reported by LiveLaw Biz and other industry publications, promoter and promoter-group holdings are frozen at the ISIN level for the duration of the buyback, subject to limited exceptions. The appointment of a merchant banker is now optional, a change Business Standard described as a way to reduce procedural complexity. If a company forgoes that intermediary, compliance duties are spread across the issuer, its auditors, the compliance officer and the stock exchange. That may simplify execution, but it also disperses responsibility across several actors.

There is, however, one further complication. IndiaCorpLaw notes that a separate corporate-law amendment bill introduced in March proposes a new framework for repeat buybacks, with a shorter gap between offers for certain companies. SEBI has aligned its own cooling-off rules with the Companies Act, so any future liberalisation will depend on whether Parliament enacts that proposal. For now, the restored exchange route looks less like a policy U-turn than a recalibration: SEBI has accepted that the tax objection no longer applies, but it has rebuilt the mechanism around controls that continue to reflect its earlier concern about unequal participation.