Firms have to spend at least 50% of funds set aside for buybacks; entry norms eased for overseas investors
India’s capital market regulator on Tuesday tightened the norms for share buybacks, moving to arrest suspected misuse of stock repurchases by listed companies in recent years.
Companies would have to ensure they spend at least 50% of the money earmarked for buybacks, the Securities and Exchange Board of India (Sebi) said after a board meeting. That doubles the current minimum of 25%.
Sebi’s new rules will require companies opting to buy back shares to create an escrow account in which they would need to keep at least 25% of the amount earmarked for the repurchases.
Should they fail to meet the 50% target, they would forfeit a sum equivalent to 2.5% of the amount allotted for the buybacks.
In a buyback, a company repurchases shares from securities holders, employees or on the open market, primarily to return surplus cash to shareholders, support the stock price during market weakness, or increase the value of underlying shares.
On 2 January, Sebi issued a discussion paper on tightening buyback norms to prevent misuse of the route.
Typically, when a company announces a share buyback, investors tend to push up its stock to get a higher price. Sebi suspected that some companies were announcing share repurchases merely to push up their market value.
“It (the new norms) addresses Sebi’s concerns on use of the buyback route," said Suresh Mathew, executive director, RPG Enterprises. “Companies will have to relentlessly pursue the objectives of buyback after these norms are effective. The norms are investor-friendly but companies may face problems."
“Stock prices often start moving up when a company announces a buyback offer. After a period, liquidity of the stock dries up. Sebi will have to resolve this issue when such a situation arises," Mathew said.
On Tuesday, the capital market regulator also reduced the maximum period available for buying back shares from the open market to six months of the date of offer from 12 months.
Companies would not be able to make another buyback offer within an year of the closure of the previous one. If a company wants to buy back stock equivalent to 15% or more of its paid-up capital, it can on do it only by way of a tender offer.
Unified foreign investment rules
Approving a Sebi committee report on the rationalization of foreign investment routes, the market regulator on Tuesday also introduced uniform entry norms for existing foreign institutional investors (FIIs), sub-accounts and qualified foreign investors (QFIs) and combined these entities under a category known as foreign portfolio investors (FPIs).
The amendments in overseas investment norms are based on recommendations made by a committee on “rationalization of investment routes and monitoring of foreign portfolio investments", headed by former cabinet secretary K.M. Chandrasekhar.
In order to make entry easier for overseas investors, the regulator relaxed the norms requiring prior registration and allowed FPIs to invest in India merely by registering with designated depository participants on behalf of the regulator.
No FII or sub-account is currently allowed to invest in India unless it secures Sebi approval. Some 1,759 FIIs and 6,403 sub-accounts are registered with Sebi.
The move assumes significance in the backdrop of the government’s efforts to attract foreign fund flows as the weakening rupee bloats the country’s import bill and widens the current account deficit. The rupee closed at 59.66 per dollar on Tuesday.
Sebi sub-divided the FPIs, based on risk, into three categories.
The first includes government and government-related entities such as foreign banks, sovereign wealth funds, multilateral organizations and so on.
The second includes banks, asset-management companies, broadbased funds such as mutual funds, investment trusts, insurance and reinsurance companies, university funds, pension funds and university-related endowments already registered with Sebi.
All FPIs that do not fall in these two categories will come under the last category, the regulator said.
The KYC (know your customer) norms for FPIs too will be risk-based with documentation needed for the first category, it being the simplest, and the last category the most stringent.
“The requirement of submitting personal identification documents such as copy of passport, photograph etc. of the designated officials of FPIs belonging to Category I and Category II shall be done away with," Sebi said in a statement
Further, the regulator said that investment by any single investor or investor group that exceeds 10% equity of an Indian company will be considered foreign direct investment.
Changes in mutual fund norms
In another key move, the regulator approved the proposal to put in place a single self-regulatory organization (SRO) for mutual fund distributors. In order to speed up the process, Sebi decided to have a cut-off time for accepting applications from potential SROs.
Further, the market regulator has allowed asset management companies (AMC) to become members of the debt segment of stock exchanges as long as it is meant to undertake trades directly on behalf of schemes managed by them.
Sebi also allowed mutual funds to appoint custodians belonging to their own group, irrespective of holdings of the fund house’s sponsor in such a custodian.
Mutual funds are currently not allowed to appoint a custodian belonging to the same group, if the sponsor of the mutual fund holds 50% or more of the voting rights in such a custodian or where 50% or more of the directors of the custodian represent the interests of the sponsor.
The market regulator has also relaxed norms and allowed fund houses to have custodians under their own group, even if the sponsor of the fund house holds 50% or more in the custodian. However, this will be allowed only if the sponsor has a net worth of at least ₹ 20,000 crore at all points of time, 50% of the custodian’s directors do not represent the sponsor, neither the custodian nor the asset management company is a subsidiary of each other and no person is a director of both the custodian and the AMC.
Sebi also allowed mutual fund distributors to take limited purpose membership of stock exchanges, similar to brokers, but with a lesser financial and compliance burden.
The move is aimed at enabling fund distributors to use stock exchange facilities for easier distribution and redemption of mutual fund units.
Such members will not require Sebi registration, compliance as members of stock exchanges, paid-up capital and base minimum capital and so on, Sebi said.
Stock exchanges can prescribe the eligibility criteria for such members.
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