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Sebi proposes overhaul of share buyback guidelines

Move spurred by misuse of the existing system

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Companies planning share buybacks from public shareholders might have to comply with stricter rules if the proposals in a discussion paper by the Securities and Exchange Board of India (Sebi) are implemented.

The regulator, in a paper released today, has proposed a complete overhaul of share buybacks done through the route. In India, companies are allowed to buy back shares through the ‘tender offer’ and ‘open market’ routes, though a majority of the purchases are through the latter route.

According to the latest proposals, a company would have to purchase at least 50 per cent of the shares it planned to buy back. At present, there is no restriction on quantity.

While buybacks currently are open for a year, wants firms to complete their buyback offerings within three months.
  

PROPOSED FRAMEWORK
  • Minimum buyback of 50% of proposed size
  • Completion of buyback within three months
  • 25% of buyback amount to be kept in escrow account
  • If buyback size is 15% or more of paid up capital & free reserves, tender route compulsory
  • No further capital raising for two years after buyback
  • Stricter disclosure norms
  • Separate window for physical shares

Also, to ensure only ‘serious players’ launch share buybacks, Sebi wants 25 per cent of the maximum buyback amount proposed be kept in an escrow account upfront.

“There is a huge gap between minimum and maximum shares bought back by companies. The proposed framework would narrow that gap as it will be between 50 per cent and 100 per cent,” said M S Sahoo, secretary, Institute of Company Secretaries of India (ICSI) and former whole-time member of Sebi.

Further, listed companies launching buyback programmes might not be allowed to raise further capital for two years and could also face restrictions on off-market deals during buybacks.

Typically, a company announces buybacks to support its share price, boost its earnings ratios or to return surplus cash to its shareholders. Sebi believes past share buybacks have failed to meet these objectives.

The regulator said it had observed there had been several instances where companies did not buy back even a single share in 12 months of the offer. Also, shares were often bought at far lower prices than the maximum buyback price announced, as there was no proper framework regarding placement of orders and periodicity.

J N Gupta, former Sebi official and managing director of Stakeholders Empowerment Services, said: “It is good move to shorten buyback offer to three months. If buybacks are open for a year, it helps firms create imaginary floor price for their shares.”

A company would have to compulsorily take the tender offer route if its buyback offer size was more than 15 per cent of its paid-up capital and free reserves, the discussion paper said. Sebi said tender offer buybacks were more equitable way of distributing surplus funds, as shares were bought at a premium under this method.

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Sebi proposes overhaul of share buyback guidelines

Move spurred by misuse of the existing system

Companies planning share buybacks from public shareholders might have to comply with stricter rules if the proposals in a discussion paper by the Securities and Exchange Board of India (Sebi) are implemented.

Companies planning share buybacks from public shareholders might have to comply with stricter rules if the proposals in a discussion paper by the Securities and Exchange Board of India (Sebi) are implemented.

The regulator, in a paper released today, has proposed a complete overhaul of share buybacks done through the route. In India, companies are allowed to buy back shares through the ‘tender offer’ and ‘open market’ routes, though a majority of the purchases are through the latter route.

According to the latest proposals, a company would have to purchase at least 50 per cent of the shares it planned to buy back. At present, there is no restriction on quantity.

While buybacks currently are open for a year, wants firms to complete their buyback offerings within three months.
  

PROPOSED FRAMEWORK
  • Minimum buyback of 50% of proposed size
  • Completion of buyback within three months
  • 25% of buyback amount to be kept in escrow account
  • If buyback size is 15% or more of paid up capital & free reserves, tender route compulsory
  • No further capital raising for two years after buyback
  • Stricter disclosure norms
  • Separate window for physical shares

Also, to ensure only ‘serious players’ launch share buybacks, Sebi wants 25 per cent of the maximum buyback amount proposed be kept in an escrow account upfront.

“There is a huge gap between minimum and maximum shares bought back by companies. The proposed framework would narrow that gap as it will be between 50 per cent and 100 per cent,” said M S Sahoo, secretary, Institute of Company Secretaries of India (ICSI) and former whole-time member of Sebi.

Further, listed companies launching buyback programmes might not be allowed to raise further capital for two years and could also face restrictions on off-market deals during buybacks.

Typically, a company announces buybacks to support its share price, boost its earnings ratios or to return surplus cash to its shareholders. Sebi believes past share buybacks have failed to meet these objectives.

The regulator said it had observed there had been several instances where companies did not buy back even a single share in 12 months of the offer. Also, shares were often bought at far lower prices than the maximum buyback price announced, as there was no proper framework regarding placement of orders and periodicity.

J N Gupta, former Sebi official and managing director of Stakeholders Empowerment Services, said: “It is good move to shorten buyback offer to three months. If buybacks are open for a year, it helps firms create imaginary floor price for their shares.”

A company would have to compulsorily take the tender offer route if its buyback offer size was more than 15 per cent of its paid-up capital and free reserves, the discussion paper said. Sebi said tender offer buybacks were more equitable way of distributing surplus funds, as shares were bought at a premium under this method.

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