SEBI’s Open Market Buyback Proposal Signals Policy Shift Leveraging Domestic Capital

At a time when Indian equity markets are navigating a difficult phase, regulatory intent assumes heightened importance. The global backdrop remains unsettled, with geopolitical tensions and ongoing conflicts weighing on investor sentiment. FIIs have been steadily pulling money out, while the rupee has shown signs of weakness. The combined effect is visible in market volatility, pressure on valuations, and a growing hesitancy among investors.

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It is against this backdrop that the recent proposal of April 2 by SEBI to reintroduce open market buybacks through the exchange route must be viewed. This, along with the MPS relaxation given on April 7, is not a mere technical regulatory adjustment. It signals a broader policy direction—that domestic capital and corporate balance sheets can play a more active role in stabilising markets in such conditions.

Open market buybacks offer companies a degree of flexibility that other routes do not. Unlike tender offers, which are episodic and one-time in nature, stock exchange buybacks allow companies to intervene gradually, absorb selling pressure, and provide liquidity over time.

A key factor behind the reconsideration of this route is the change in tax treatment. Earlier, the buyback tax regime created distortions between participating and non-participating shareholders. With the shift to capital gains taxation in the hands of shareholders, that asymmetry has largely been addressed. The revised framework is more neutral and aligns India more closely with global practice.

Importantly, the proposal retains several safeguards aimed at preserving market integrity. These include a separate trading window for buybacks, exclusion of promoters from participation, limits on daily purchase volumes, price restrictions linked to prevailing market conditions, minimum utilisation requirements, and enhanced disclosure norms. Together, these measures seek to balance flexibility with fairness.

There is also historical precedent for such calibrated interventions. Following the Lehman Brothers collapse, SEBI relaxed creeping acquisition limits in 2009, allowing promoters to increase their stake beyond earlier thresholds. That move was aimed at restoring confidence and enabling capital support at a time when markets were under severe stress. In the current environment, it would not be surprising if similar measures, such as a calibrated relaxation of creeping acquisition limits, are considered once again.

There is nothing inherently problematic in such regulatory responses. Markets are, at their core, confidence-driven systems. When confidence is shaken by external shocks, it is both legitimate and necessary for regulators to create enabling conditions for stabilisation. However, it is equally important that the intent behind such measures is clearly articulated. If the objective is to support market conditions, it should be explicitly stated. Transparency in purpose enhances credibility and reduces the risk of misinterpretation.

At the same time, the reintroduction of open market buybacks raises important structural and governance considerations that must be addressed. One key issue relates to promoter shareholding. While promoters are not permitted to participate in open market buybacks, the reduction in public float resulting from such buybacks mechanically increases promoter shareholding as a percentage of total equity. This can lead to situations where promoter holding breaches the maximum permissible non-public shareholding limit of 75 percent.

The current framework requires companies to restore minimum public shareholding compliance within a specified timeframe. However, in stressed market conditions, rigid adherence to this threshold may not always be optimal. For large, widely held companies—particularly among the top 200 by market capitalisation—a more flexible approach could be considered to bring promoter holding back to less than 75%.

Another critical concern is the potential for insiders to benefit disproportionately from buyback-induced price support. When companies step into the market and provide a price floor through buybacks, there is a risk that insiders, by virtue of their information advantage, may sell into this strength and realise gains that are effectively supported by corporate action.

This risk needs to be addressed explicitly. A strong case exists for restricting insider selling from the time of buyback announcement until a reasonable period after its completion. In addition, a disgorgement-based mechanism could be introduced. If insiders sell shares within, say, six months of the completion of a buyback, any incremental gains attributable to the supported price environment should be required to be transferred back to the company. This would ensure that the benefits of buybacks accrue equitably and are not selectively appropriated.

Such safeguards are essential not only for fairness but also for preserving trust in the market. Regulatory interventions that are perceived to disproportionately benefit insiders risk undermining the very confidence they seek to restore.

If the current proposal is part of a broader strategy to stabilise markets, it could be complemented by a few additional measures that similarly leverage domestic capital.

A calibrated relaxation of creeping acquisition limits, as discussed earlier, would enable promoters to play a more active role in supporting their companies’ stock prices during periods of stress. Similarly, allowing larger and more flexible share repurchases, subject to enhanced governance and disclosure standards, would enable cash-rich companies to deploy capital more effectively when valuations are depressed.

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Another reform worth considering is the introduction of a limited and tightly regulated treasury stock framework. At present, shares bought back in India are extinguished. Allowing companies to hold treasury shares for a defined period would provide flexibility to reissue them when market conditions improve, thereby smoothing capital cycles and reducing the need for fresh issuance at unfavourable valuations. Such a framework would, of course, need strict safeguards to prevent misuse.

Finally, strengthening the role of domestic institutional capital as a counter-cyclical stabiliser can provide an important buffer against external shocks. Enabling mutual funds, insurance companies, and pension funds to participate more actively during periods of stress, through carefully calibrated regulatory flexibility, can help offset foreign outflows and support market stability.

Taken together, these measures reflect a broader strategic shift—one that relies not solely on external capital flows but increasingly on domestic resilience to maintain market stability. In conclusion, SEBI’s proposal to reintroduce open market buybacks is a timely and well-intentioned step. It reflects a pragmatic recognition that markets sometimes need support and that corporate balance sheets can serve as an important stabilising force. However, for the measure to achieve its full potential, it should be accompanied by clarity of purpose, thoughtful recalibration of shareholding norms, and robust safeguards against insider advantage.

The writer is a retired IRS officer and Ex-Chief of Surveillance at SEBI. Advisor to corporates, market participants and tech entrepreneurs.

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