March 2026 was a rough month for Indian markets. Foreign Portfolio Investors (FPIs) pulled out a staggering ₹1,13,380 crore from the cash market—the highest monthly exodus on record. Year-to-date outflows hit ₹1.27 lakh crore, dragging the Nifty down by 2.4% in January alone. The India VIX, a measure of market fear, hovered around 22, signaling sustained uncertainty.
Yet, there's a silver lining. Corporate balance sheets are in "absolute healthy shape," with companies sitting on surplus cash after raising a "humongous amount of money" over the preceding three years. Market experts describe the revival of open market buybacks as the "absolute need of the hour"—a mechanism for companies to deploy this cash productively while absorbing selling pressure and boosting investor confidence.
The stock exchange route for open market buybacks was discontinued on April 1, 2025, due to concerns about price-time matching allowing selective participation and taxation disparities creating unequal outcomes. Since then, companies could only use the tender offer route—a fixed-price mechanism closing within 10 working days, requiring SEBI review, and reserving 15% for small shareholders.
SEBI now proposes reintroducing the stock exchange route, but with a game-changing twist: taxation reform. Effective April 1, 2026, buyback proceeds are taxed as capital gains in shareholder hands rather than the previous regime where companies paid buyback tax. This eliminates the differential tax advantage between participating and non-participating shareholders that plagued the earlier framework.
Under the new regime, long-term holdings face 12.5% tax (with exemption up to ₹1.25 lakh), short-term holdings attract 20%, while promoters pay 22% (corporate) or 30% (individual). This fundamental shift makes buybacks significantly more tax-efficient, particularly for retail investors in higher tax brackets.
The tax implications are dramatic. Consider a company returning ₹1,200 to shareholders. Via dividend, the full ₹1,200 is taxable at 30%, resulting in ₹360 tax and ₹840 net proceeds. Via buyback (assuming acquisition cost of ₹800), only the ₹400 gain is taxed at 12.5% LTCG, totaling ₹50 tax and ₹1,150 net proceeds. That's an 86% tax saving—₹310 more in the shareholder's pocket.
This efficiency advantage is progressive across income brackets. While a 5% slab taxpayer saves only ₹10 (17%), a 30% slab taxpayer saves ₹310 (86%). Buybacks also enable loss harvesting—capital losses can be set off against other gains and carried forward for eight years, a flexibility unavailable with dividends.
The availability of open market buybacks fundamentally changes how companies allocate capital between dividends, buybacks, and reinvestment. Companies with undervalued shares, strong cash generation, and low leverage are best positioned to leverage this mechanism.
The IT services sector illustrates this strategic approach. Despite weak revenue growth (2.5-5.2% quarter-on-quarter in Q2 FY26), companies like Tata Consultancy Services, Infosys, and HCL Technologies have maintained steady payouts through a combination of dividends and buybacks. TCS executed 19 dividends and 2 buybacks since 2022, while Infosys conducted 9 dividends and 2 buybacks in the same period. This pattern suggests IT companies use buybacks strategically during weak growth phases to support shareholder returns while preserving cash for strategic investments in AI and digital transformation.
Buybacks reduce shareholders' equity, which mathematically increases Return on Equity (ROE) assuming net income remains constant. Consider two identical companies over five years: Company A with no buybacks maintains ₹230 crore equity and earns ₹23 crore, yielding 10% ROE. Company B executes ₹110 crore in buybacks, reducing equity to ₹140 crore while earning ₹28 crore, yielding 20% ROE.
The 40% equity reduction combined with higher income doubles the ROE. However, this creates an "artificial" inflation that doesn't reflect operational improvement. Investors must look beyond ROE to metrics like Return on Invested Capital (ROIC) and Return on Assets (ROA) to assess true financial health.
Regulatory constraints also matter. Companies must maintain a debt-to-equity ratio below 2:1 post-buyback (6:1 for government NBFCs/HFCs). High-leverage companies have limited buyback capacity, while low-leverage firms enjoy maximum flexibility.
Open market buybacks influence trading volumes and liquidity through multiple mechanisms. Companies become structural buyers, adding depth to the bid side of the order book. This narrows bid-ask spreads, reduces transaction costs, and attenuates the price impact of order imbalances during selling pressure.
The signaling value of buyback announcements is complex. Traditional theory suggests buybacks communicate management confidence about undervaluation. However, recent research highlights that executive compensation structures significantly influence credibility. Markets react more favorably when executives have high wealth sensitivity to stock price (Delta) and low incentives to increase firm risk (Vega). Buybacks announced during market downturns send stronger contrarian signals, particularly when companies have strong cash positions despite market stress.
Executing open market buybacks presents significant operational challenges. Companies must establish escrow accounts with 25% of buyback consideration (up to ₹100 crore) plus 10% thereafter, plus an additional 1% cash security. For a ₹1,000 crore buyback, this means ₹350 crore upfront—35% of the buyback size locked away.
SEBI's proposed framework introduces stricter utilization requirements: 75% of the earmarked amount must be utilized (up from 50%), with 40% required within the initial half of the specified duration. This creates front-loaded execution pressure and market timing risks.
The separate trading window mechanism requires technical integration with exchange-specific platforms, modified order routing systems, and enhanced surveillance. Companies must also navigate electronic filing requirements with digital signatures, lender consent for covenant compliance, and comprehensive record-keeping obligations.
The reintroduction of open market buybacks, combined with the new capital gains taxation regime, creates a fundamentally different landscape for shareholder returns in India. Companies with strong cash generation, low leverage, and undervalued shares are best positioned to leverage this mechanism effectively.
For investors, the key is to evaluate buyback signal credibility by assessing management incentives, timing context, scale, execution track record, and financial position. As earnings growth slows across markets, dividends and buybacks are likely to have larger influence on Total Shareholder Return, making capital allocation decisions increasingly critical for long-term wealth creation.
The deadline for public comments on SEBI's proposal is April 23, 2026. Once finalized, this framework could reshape how Indian companies return capital to shareholders, potentially reducing the persistent dilution trend that has historically characterized emerging markets relative to developed markets.
