Mumbai: The Securities and Exchange Board of India, or Sebi, on Wednesday, proposed to tighten buy-back norms for listed firms in the backdrop of widespread misuse in the past few years.
Companies buy shares from securities holders, employees or the open market, primarily to return surplus cash to shareholders, support the stock price during market weakness, or increase the value of underlying shares.
The market regulator, in a discussion paper posted on its website, proposed to make it mandatory for companies to buy-back at least 50% of the offer announced by them. This minimum limit is currently 25%.
Sebi observed that many companies did not make a move to buy shares even after getting shareholder approval. Moreover, several firms were seen to be buying shares merely at the market price, which was often significantly lower than the price disclosed at the time of making buy-back announcements.
Of the 75 buy-back cases through open market purchases during the three financial years between 2008 and 2010, an average of 49.91% of the maximum offer size was utilized by the companies for the buy-back.
“This suggests that despite the intention disclosed by companies to their shareholders at the time of making buy-back offer, the buy-back offer is not used as an opportunity for enhancing the book value of the shares of the company,” said Sebi.
The market regulator has also proposed to reduce the maximum period to complete a buy-back to three months from the current one year to ensure that only serious companies announce buy-back programmes. Companies announcing buy-backs could be mandated to put 25% of the maximum amount proposed for buy-back in an escrow account, the Sebi discussion paper suggested.
“The new rules will prevent companies from playing with the market. Currently, buy-back is misused by companies as a tool to set a benchmark artificially. From investors’ point of view, it is a welcome move. But companies may find it difficult to stomach the reduction of duration of buy-back to three months,” said Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities Pvt. Ltd.
In the past two calendar years, out of 54 buy-back announcements by listed firms, only 18 actually happened, according to Mint research.
The proposal, if implemented, will restrain a listed firm from raising further capital for two years after launching a buy-back programme. If the company fails to complete the buy-back, it may not be allowed to hold another buy-back for at least one year, said the discussion paper. Companies are currently allowed to hold back-to-back buy-backs if shareholders approve.
Sebi has also proposed to make it compulsory for companies to take the tender offer route if a company opts to buy-back 15% or more of its paid up capital plus free reserves.
During the period of buy-back, promoters are proposed to be restrained from dealing in securities of the company in any way.
Sebi has sought comments on the proposal until 31 January.