The debate around capital allocation and investor protection in Indian equity markets has resurfaced, with prominent investor Madhu Kela supporting calls to allow open market share buybacks. His remarks follow similar suggestions from former Infosys CFO Mohandas Pai, who has urged the Securities and Exchange Board of India to revisit existing norms amid heightened market volatility and sustained foreign portfolio investor outflows.

In a recent television interaction, Kela emphasised that while the issue of buyback flexibility may not have appeared urgent earlier, the current market environment has brought it into sharper focus. Retail investors, who have significantly increased their participation in equities over the past three to four years, are now facing elevated uncertainty due to volatile price movements. According to Kela, this shift in investor sentiment warrants policy attention, especially as household savings have increasingly flowed into capital markets.

At the core of the discussion is the structure of buybacks permitted under Indian regulations. Currently, companies primarily execute share buybacks through the tender offer route, which requires committing a fixed amount within a defined time frame. While open market buybacks are technically allowed, an additional tax burden reported to be around 25 percent acts as a deterrent, limiting their practical use. This has led to calls for a review of the framework to make capital return mechanisms more flexible and responsive to market conditions.

Kela argued that Indian corporates are in a relatively strong financial position, with several companies holding surplus cash on their balance sheets. In such a scenario, restricting how this capital can be returned to shareholders may lead to inefficient allocation. He highlighted that these funds ultimately belong to shareholders and should be deployed in ways that enhance value, particularly for minority investors who may not always benefit proportionately under existing structures.

The broader implication of enabling open market buybacks lies in its potential to act as a stabilising mechanism during periods of market stress. With foreign portfolio investors continuing to reduce exposure in Indian equities, domestic institutional and retail flows have played a critical role in absorbing supply. However, recent volatility has tested this resilience. Allowing companies to step in as buyers of their own shares could provide an additional layer of demand, potentially cushioning downside risks.

From a policy perspective, the discussion also reflects a balancing act for regulators. On one hand, there is a need to protect investor interests and ensure transparency in corporate actions. On the other, overly rigid frameworks may limit the ability of companies to respond dynamically to market conditions. Kela acknowledged this trade-off, suggesting that any move towards easing buyback norms should be accompanied by appropriate safeguards to prevent misuse.

For Indian markets, the timing of this debate is significant. The post-pandemic period saw a surge in retail participation, supported by digital platforms and strong market returns. However, as volatility has increased, the behaviour of these investors has become more sensitive to drawdowns. Measures that reinforce confidence whether through policy adjustments or corporate actions could play a role in sustaining long-term participation.