Sebi Chief Lobbies For Share Buyback By Promoters

The Securities & Exchange Board of India (Sebi) has recommended to the government to allow promoters to buy back shares to boost the capital markets.

In a letter to the finance ministry, Sebi chairman D R Mehta has argued that though limited buyback is expected to figure in the amended Companies Act, it could be permitted immediately, if promoters are allowed to set up trusts for the purpose.

The existing company law permits firms to buyback its shares. Trusts too are permitted to buy shares. A reduction in equity by a company has the beneficial effect of shoring up the share value. In a depressed market, however, if several promoter groups resort to this practice, it would lift up the index, thereby, the overall market sentiment.

 

Mehta has suggested a meeting between Sebi, the finance ministry and the department of company affairs (DCA) to discuss setting up of trusts to make it easy for promoters to buy back shares.

Mehtas position is not new. Market experts and intermediaries have repeatedly argued that irrespective of the legal position, buyback is a normal market practice, resorted to by promoters prior to a public issue.

It is also not uncommon though illegal for promoters to shore up their scrip prices in the face of price hammering by bear cartels on the eve of a company expansion, joint venture agreement, tie-up or merger.

With the institutionalisation of the capital markets, price hammering has moved out of the realms of domestic broker lobbies to the institutional players.

Companies with bloated equity usually benefit from buyback. It permits fresh issuance of equity at a later date and at a higher premium. In the present scenario, the value of the share stands eroded on account of a large base.

Such companies can explore the possibility of expansion through equity post reduction, failing which they are totally dependent on debt for fund expansion.

Hence, the advantage of moving in and out of equity and debt in response to changing return on capital is lost to such companies. With the government now permitting hostile takeovers, the grounds for permitting buyback as a means of protection to existing managements also gains currency.

At present, return of equity is possible by a company, provided it is sanctioned by the high court. This route, however, is considered to be time-consuming.

FMs objections

The finance ministry has opposed the Sebi proposal on the grounds that the Indian markets are far too immature and the regulatory framework inadequate to monitor the orderly implementation of the scheme.

It fears since the dividing line between buyback and price-rigging is thin, the existing level of market intelligence with the capital market regulator would be inadequate to meet the task on hand.The ministry, however, recognises the importance of buyback as a tool for capital restructuring, which can be equally achieved when the shares bought back are extinguished and not retained by the company for reissuance at a later day.

Such retention has the advantage of permitting the company to reissue the shares at will without seeking the necessary Sebi clearances for a new issuance.

The working group on Companies Act, constituted by the finance ministry, has favoured the introduction of buyback of shares with adequate safeguards.

Among the safeguards under consideration is the imposition of a lockin period, whereby, the shares bought by the promoter cannot be reissued for a specified period of time. Though a final view is yet to be taken, the working group is in favour of a 2-3 year lock-in.

With such safeguards, the new provision would be similar to reduction of equity through the high court route. The biggest advantage will be the speed since the process could be completed faster under Sebi supervision.