Capital markets regulator Sebi on Wednesday proposed measures to streamline the process of buybacks of securities from the open market in a bid to make such process robust, efficient, transparent and shareholder-friendly. Under the proposal, Sebi has proposed to introduce a glide path with respect to the reduction in the maximum limit and the time period for completion of the buyback offer under the stock exchange mechanism, according to the consultation paper. Further, a separate window on the stock exchange may be created for undertaking buyback through this route.
Currently, rules provide that buyback from the open market through the stock exchange should be less than 15 per cent of the paid-up capital and free reserves of the company, based on both standalone and consolidated financial statements of the company.
A time period of six months has been provided from the date of opening of the offer for the buyback offer to be closed at present. This may result in artificial demand being created for the relevant company’s shares during such an extended period of time and trading of shares occurring at an exaggerated price, Sebi noted.
The Securities and Exchange Board of India (Sebi) has sought public comments until December 1 on the proposals. In case of buybacks through the stock exchanges, the company should that 75 per cent of the amount earmarked for the buy-back of securities is utilized for buying-back shares. At present, the present limit is 50 per cent.
The company should ensure that at least 40 per cent of the amount earmarked for the buyback is utilized within half of the duration specified as per the glide path. The buyback through stock exchanges should only be undertaken in respect of frequently traded shares. The markets regulator has proposed that a company which is net debt free should be permitted to undertake up to two buybacks in a single financial year.
This is subject to both buybacks being undertaken through tender offers and the second buyback being undertaken not earlier than six months from the date of expiry of the buy-back period of the preceding offer for the buyback. Apart from the stock exchange mechanism, Sebi has proposed a revised mechanism for effecting open market buybacks through the book-building process.
Under this, promoters along with their associates will not be permitted to participate in such a method of buyback. Sebi has proposed to the government to shift the incidence of tax on buyback from the company to the hands of shareholders.
The current mechanism of buyback tax appears to be tilted in favour of those shareholders who tender their shares and take exit (partially or fully) from the company and adversely impacting the interest of shareholders who do not wish to tender their shares under buyback.
As a result, all the continuing shareholders have to share the burden of tax payable by the listed company on the buyback proceeds of the shares tendered by exiting/tendering shareholders.
These proposals came as Sebi has been receiving several suggestions and representations from market participants requesting for a review of certain substantive provisions pertaining to the buyback of specified securities, buyback through tender offer as well as from open market through stock exchange mechanism.
