SEBI Open Market Buyback Return: Consultation Paper
Why in the news
SEBI floated a consultation paper to restore open market buybacks, a route it had earlier decided to wind down. The change of heart follows a tax reform that removes the old unfairness.
Key facts
- Buyback: a company purchases its own shares to cut the number of shares outstanding.
- Tender offer (current main route): the company offers a fixed quantity at a set price, usually at a premium, and accepts shares from holders proportionately.
- Open market purchase (proposed to return): the company buys from the stock exchange over time at the going market price.
- SEBI had earlier decided to phase out the open market route by April 2025.
| Feature | Tender offer | Open market |
|---|---|---|
| Where shares come from | Directly from shareholders | Stock exchange |
| Price | Fixed, usually at a premium | Prevailing market price |
| Timing | Formal offer window | Spread over a period |
The tax factor
- Earlier: the company paid the buyback tax, so participating shareholders got money tax-free while ordinary sellers paid capital gains tax. This tax arbitrage was the reason for the ban.
- After April 2026: proceeds are taxed as capital gains with the shareholder, so tax treatment is the same whether one sells to the company or to another buyer.
- With the inequity gone, SEBI sees the open market route as no longer unfair.
Benefits cited
- Industry bodies FICCI and AIBI backed the return.
- Simpler and quicker than a formal tender process.
- Lets firms soak up selling pressure gradually, easing sharp price falls.
- Cancelling the bought shares shrinks share count and lifts earnings per share (EPS).
Safeguards
- A separate trading window, apart from normal trading.
- Price bands and limits on daily purchase volume and top price.
- Order matching on the exchange so all holders have equal access to sell.
Exam angle
- Regulator: SEBI; document type: consultation paper.
- Key trigger for reversal: change in buyback taxation from April 2026.
- Related terms: tender offer, tax arbitrage, EPS.