After tender offers, Sebi to now review open-market buybacks

After overhauling the tender offer buyback process, the capital markets regulator, the Securities and Exchange Board of India (Sebi), will review buybacks done through the open market route.

Market experts say the review of the open-market route is critical, as a majority of the buybacks are conducted through this route.

Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities, said: “The changes made to the buyback process have only theoretical significance, as hardly any buybacks are done through the tender offer route.” He added that about 99 per cent of the buybacks conducted in India were through the open-market route.

At present, the buyback of securities can be done through two methods — tender offer and open-market operations.

Under the tender route, buyback is done on a proportionate basis, while in an open-market route, a company buys back shares through stock exchanges, or a book-building process. A company buys back shares through stock exchanges at existing market prices via the order matching mechanism.

Sebi has not yet made any change to the open-market buyback process, but it intends to do so in the second phase.

According to the revised guidelines on tender buybacks, companies will have to announce the buyback ratio, as in the case of rights issues, and fix a record date for the determination of entitlements, according to shareholding on the record date. The new regulations will help reduce the timeline for completion from the current 63-114 days to 34-44 days. Buyback througha tender offer will remain open for 10 days and payment to shareholders will be made within 10 days of closure. Sebi will provide its observations within seven days.

A senior official at a leading domestic brokerage said, to ensure ‘equitable treatment’ to all shareholders, Sebi will have to overhaul the open-market route, as it puts small shareholders in a very disadvantageous situation.