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Proposed buyback rules 'too restrictive: Bankers and lawyers

This rule will also bar companies from M&A activities that involve the issuance of new shares: J N Gupta

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Securities and Exchange Board of India’s (Sebi) proposals to have stricter rules for are ‘too restrictive’, and lawyers said on Thursday.

“Prohibiting companies from issuing new shares for a period of two years after a buyback is very restrictive. A company while announcing a buyback offer may not have any expansion plan but there might be a need to raise fresh capital if the company bags a new project or order immediately after the buyback,” said J N Gupta, managing director, Stakeholders Empowerment Services.

Gupta said that this rule will also bar companies from (M&A) activities that involve the issuance of new shares.

“There are two sets of shareholders involved in a buyback. The ones who exit the company by selling their shares and the one who are left behind as shareholders. Clearly, these proposals will hurt those shareholders who have faith in the company in the longer term and people who exit or have speculative interests will be benefited,” said Sandeep Parekh, founder of Finsec Law Advisors.

NUMBER OF BUYBACK OFFERS
2008 32
2009 38
2010 11
2011 29
2012 25
Source Capitaline
Compiled by BS Research Bureau

on Thursday, through a discussion paper, proposed a new set of measures that include purchase of a minimum 50 per cent of the announced buyback offer and also completion of the process in three months. It also proposed a two-year ‘cooling-off’ period from capital raising after a buyback. At present, the minimum purchase requirement is just 25 per cent and time for completion of buybacks is one year.

Investment bankers said the shortening of the buyback period from one year to just three months will prove to be challenging. They add if the share price of a company moves higher than the maximum buyback price, the company may not be able to buy the mandated 50 per cent. For instance, if the share price of a company is quoted at Rs 100 and if buyback is announced at Rs 150. After the start of the buyback programme if the price crosses Rs 150, the company won’t be able to purchase new shares.

“There will be a possibility that a company may be penalised for not buying 50 per cent shares despite putting all the efforts if the price moves higher,” said an investment banker, who didn’t wish to be named.

“Sebi needs to do a further analysis before mandating minimum quantity and other restrictions on companies doing buybacks,” said Parekh.

Gupta believes Sebi might have to carve out some exemptions to the proposed rules. “Sebi’s intentions behind the proposed rules may keep non-serious players away. However, some of the rules might even hurt genuine buyback offers. It may have to make some exemptions in genuine cases,” he said.

Investment bankers and lawyers may seek a more watered-down version of the discussion paper on the share buyback laws by Sebi when they send their feedback to the regulator over the next month.

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Proposed buyback rules 'too restrictive: Bankers and lawyers

This rule will also bar companies from M&A activities that involve the issuance of new shares: J N Gupta

Securities and Exchange Board of India’s (Sebi) proposals to have stricter rules for share buyback are ‘too restrictive’, investment bankers and lawyers said on Thursday.

Securities and Exchange Board of India’s (Sebi) proposals to have stricter rules for are ‘too restrictive’, and lawyers said on Thursday.

“Prohibiting companies from issuing new shares for a period of two years after a buyback is very restrictive. A company while announcing a buyback offer may not have any expansion plan but there might be a need to raise fresh capital if the company bags a new project or order immediately after the buyback,” said J N Gupta, managing director, Stakeholders Empowerment Services.

Gupta said that this rule will also bar companies from (M&A) activities that involve the issuance of new shares.

“There are two sets of shareholders involved in a buyback. The ones who exit the company by selling their shares and the one who are left behind as shareholders. Clearly, these proposals will hurt those shareholders who have faith in the company in the longer term and people who exit or have speculative interests will be benefited,” said Sandeep Parekh, founder of Finsec Law Advisors.

NUMBER OF BUYBACK OFFERS
2008 32
2009 38
2010 11
2011 29
2012 25
Source Capitaline
Compiled by BS Research Bureau

on Thursday, through a discussion paper, proposed a new set of measures that include purchase of a minimum 50 per cent of the announced buyback offer and also completion of the process in three months. It also proposed a two-year ‘cooling-off’ period from capital raising after a buyback. At present, the minimum purchase requirement is just 25 per cent and time for completion of buybacks is one year.

Investment bankers said the shortening of the buyback period from one year to just three months will prove to be challenging. They add if the share price of a company moves higher than the maximum buyback price, the company may not be able to buy the mandated 50 per cent. For instance, if the share price of a company is quoted at Rs 100 and if buyback is announced at Rs 150. After the start of the buyback programme if the price crosses Rs 150, the company won’t be able to purchase new shares.

“There will be a possibility that a company may be penalised for not buying 50 per cent shares despite putting all the efforts if the price moves higher,” said an investment banker, who didn’t wish to be named.

“Sebi needs to do a further analysis before mandating minimum quantity and other restrictions on companies doing buybacks,” said Parekh.

Gupta believes Sebi might have to carve out some exemptions to the proposed rules. “Sebi’s intentions behind the proposed rules may keep non-serious players away. However, some of the rules might even hurt genuine buyback offers. It may have to make some exemptions in genuine cases,” he said.

Investment bankers and lawyers may seek a more watered-down version of the discussion paper on the share buyback laws by Sebi when they send their feedback to the regulator over the next month.

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