These new guidelines are in recognition of the fact that the buyback guidelines for the stock exchange mechanism have been grossly misused over the years. Initially, there was no mandate on the amount of buyback that was required and therefore, companies would announce very high buyback price, not buy single share for the whole year and give wrong signal to the investors.
As part of SEBI’s constant endeavour to align regulatory requirements with the changing market realities as well as to enhance efficiency of the buy-back process, the following changes to buyback of shares or other specified securities from the open market through stock exchange mechanism have been approved:
1. The Companies will have to buy-back mandatorily 50% of the amount targeted and reserved for the buy-back (Existing Provision: 25%),
The Companies that fail to meet the Buy-back target will:
a. Not be allowed to come up with another offer for one year.
b. Amount in the escrow account would be forfeited subject to a maximum of 2.5% of the total amount reserved for Buy-back.
Analysis: According to Section 77A (4) of the Companies Act, 1956 every buy back is to be completed within a period of 12 months. The period of 12 months is misused by the Companies by keeping the buyback offer open for the entire period instead of fixing a definitive period. More to say, even after keeping the buyback offer open for such a long time, the companies do not buy a single share or failed to achieve the minimum buyback quantity. (25% earlier) They buy orders at their discretion instead of placing them on regular basis and that too at a price away from the market price. To curb this, the amendment increases the limit to 50% and also imposes penalty by forfeiting the Escrow Amount.
2. The companies would have to complete their buyback offers within 6 months (Existing: one year)
Analysis: This way even when the Companies try to keep offer open for the entire period, 6 month period is too short a time period to affect the security holders. Thus the 6 month cap is a check on the lingered offer period.
3. The company cannot raise further capital for a period of one year from the closure of the buy-back except in discharge of subsisting obligations (Existing: 6 months)
4. The companies shall create an escrow account towards security for performance with an amount equivalent to at least 25% of the amount earmarked for buy-back.
Analysis: The mandate of 25% Escrow amount helps assure the sellers of the Companies™ intention and capability to buy back shares. Hence, the Escrow Amount acts as a hurdle for Companies that refuse to buy back shares at a later stage.
5. The companies will now be required to make public disclosures on a daily basis through its website and to stock exchanges of the number of shares purchased and the amount utilized. (Existing Provision: Daily, fortnightly and monthly disclosures)
Analysis: This provision has been inserted so as to facilitate increased transparency for the shareholders. Choosing between the options to withhold the share of a Company or to abandon it is a risky task. The dissemination of key information shall present the actual picture of the Companies™ assets and liabilities and safeguard against misleading buy back offers.
6. The companies can buy-back 15% or more of capital only by way of tender offer. (At present there are two routes by which a company can come out with a buyback – open market and tender offer. In an open market offer, companies can buy back shares from shareholders without knowing the buyer, while tender offer involves the company writing to its shareholders individually to know their willingness for sale of shares in the buyback.)
Analysis: The stock exchange route has been misuse time and again. The tender offer method will not only enable the security holders to know and judge who they are selling to but also express their willing regarding the sale of the shares to a particular Company.
7. The promoters of the company cannot execute any transaction, either on-market or off-market, during the buyback period.
Analysis: The promoters of the company are barred from executing any other transaction which might result in the Company stepping out of the buy back offer. Thus, the buy back period is insulated from all such transactions.
8. Buy back of Physical Shares (odd-lot) would require creation of separate window in the trading system for tendering of shares and would require PAN/Aadhar verification.
Analysis: SEBI™s regulation of buy back has not left even the odd-lot untouched. The odd-lot no longer remains an easy way out to abuse the system of buy back. Requirement of PAN/Aadhar verification makes it more authorized and enables identification of both the buyer and the seller.
9. The companies will be allowed to extinguish shares bought back during the month, within 15 days of the succeeding month subject to the last extinguishment within 7 days of the completion of the offer.
Analysis: The speedening up of the process of extinguishment of shares after buy back, introduced by the amendment, leads to a fall in the outstanding equity shares, thereby bringing stability to its stock price.