Securities and Exchange Board of India, (SEBI), in its notification dated 7 February, 2023 has bought in SEBI (Buyback of Securities) (Amendment) Regulations, 2023. The applicability date of these amendments is 9 March, 2023 which is fifteenth day from the date of publication of the amendments in the official gazette. In this article, we would first take a look upon the changes that has been made by Securities and Exchange Board of India (SEBI) in the process of Open offer buy backs, then we would put a glance upon the nature of the amendments and finally we would pursue an analysis of all the amendments and see what effect it would have now in the process of buyback.
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What is a buyback
Before getting into the amendments, let us have a look upon what is a buyback. Buybacks are not defined in the Securities and Exchange Board of India (Buy-back of Securities) Regulations 2018 but it generally means share repurchase and it happens when a company buys its own shares. A company might want to reduce the number of shares which is available in the open market or there can be various other reasons as to why a company might buy back its shares. When a company buys its own shares, the number of shares that exist in the market gets reduces and this increases the Earning per Share ratio and the price to earnings ratio decreases which eventually leads to the increase in share price. A buyback might also signify that the company has sufficient cash available with them and there is very less probability that the company may encounter any economic troubles in future. This increases the investor’s confidence. Other reasons of buy backs might include compensations in form of ESOPs that company provides to their employees in the form of bonuses.
The Amendments
On 16 November 2022, SEBI had bought it in a consultation paper that was based on the suggestions that the sub-group headed by Mr Keki Mistry that aimed to provide reforms for the buyback regime along with certain statutory amendments. Based on the suggestions provided in this consultation paper, SEBI in its board meeting on December 20, 2022 approved the amendments
Regulation 4 of the buyback regulations 2018 provides us with three ways to buy back the shares of the company, namely,
- Tender Offer on a proportionate basis
- Open market offer through stock exchanges and book building process
- Purchasing shares from odd lot holders
SEBI on its website had published a data which showed that out of all the options, the mechanism of tender offer is preferred the most as compared to other options available. This is mainly because of the fact that it gives equal chance of participation from all the shareholders since the buyback takes place on a proportionate basis for the shareholders who tender their shares for the repurchase.
Coming to the open market route through stock exchanges, the present amendment provides for a systematic phasing out of the same owing to the limitations that this process contains. Some of the major limitations that it contains are-
(i) It provides limited opportunity to the shareholders rather than treating them on a proportionate basis which is against the principle of equitable treatment to all the shareholders.
(ii) The time limit between opening of the offer and the closure of the buyback is six months as provided currently in the regulations. This may lead to the creation of artificial demand of the shares of the company within such time limit and this may lead to the trading of the shares at an inflated price. This would compromise on the interest of the company as they would be required to pay more than what the real price of the share is.
(iii) This may also lead to the manipulation of prices of the shares of the company
The SEBI took into account all these limitations and provided for a “glide path” exit to the open market offer which are as follows-
The current threshold provides for a limit of 15% for the buy back with the maximum time period for completion being 6 months. The same would be reduced to 10% with time period of 66 working days from April 1st 2023. Subsequently, the number would reduce to 5% with time period of 22 working days from 1 April 2024 and from 1 April 2025 the system would entirely phase out.
Other Amendments to the Open Market offer
Apart from phasing out of the open market offer through stock exchanges, several other amendments were also made. An explanation has been added to regulation 16(i) of the concerned regulation which says that the stock exchange through which the buyback is being executed needs to create a separate window for facilitating the entire process. since shares are bought back at prevailing market price, acceptance of shares under buyback is matter of chance for most shareholders and thus there is no clarity as to whether shares are accepted under buyback or sold in open market and therefore the shareholders are unable to claim the benefits arising out of buybacks. In order to remove this ambiguity a separate window on stock exchange is created for undertaking buyback through this route.
Additionally it was also said that until the entire system of buy back through stock exchanges do not phase out, the buy back through the route of stock exchanges would be limited only to frequently traded shares, because price determination, which is the very foundation of buy back through stock exchanges, for infrequently traded shares is difficult to take place. It was added that the definition of “frequently traded shares” would be the same as mentioned in the Regulation 2(j) of SEBI Takeover Code of 2011.
Lastly, SEBI has now put restrictions on volume and price of the shares during a buy back. Previously, in buy back through stock exchanges as there were no price or volume restrictions that were specified under the buy-back regulations and this mostly led to circumstances were the trading price of the shares of the company becomes inflated. This might also lead to stock manipulations by the company. To counter this, SEBI has now said that there would be restrictions put on the number of bids, price and volume and these would be notified by SEBI though its circulars from time to time basis.
Amendments in the book building process of open market buy back
Book building process is the least preferred method of buy back. In page number 24 of the agenda note, it was said that the last time a company bought its own shares using buy back mechanism was back in 1988. Keeping in mind this fact, SEBI has proposed a revised framework in the book building process. The important amendments which are done in the same includes prescribing a timeline for events such as making a public announcement, commencement of a buy-back offer, information to stock exchanges, sending shareholders the notice of the same and paying the required consideration. This would make the process of buy book though book building much faster as compared to the previous timeline. Subsequently, SEBI has also prescribed for additional disclosures for this process which means that now there would be an increase in the transparency in the process. This move might benefit the shareholders and SEBI itself but this might not be a welcoming note for the companies as they would now need to adhere to more compliance than before for buying back their own shares. This may lead to plethora of litigation against SEBI by the companies who might question as to why they are subjected to additional compliances to buy back their own shares.
Conclusion
The present amendments aim to provide a well-organized process for the buy-back of securities of the listed entities and it tries to eliminate the loopholes that existed in the regulation. It also aims to provide ease to the listed entities at one end but also ensures that the interests of the stakeholders. While the majority of the recommendations in the Consultation Paper have been incorporated into the Buy-back Regulations through the Amendment, some recommendations, such as expanding the permitted buy-back limits or recommendations regarding the tax treatment, have currently been dropped because they may also need the approval of other regulatory authorities, like the MCA and the MoF, as well as changes to other related laws. The Board Meeting’s agenda note (“Agenda Note”) also states that SEBI will consult with the MCA and MoF, respectively, to get their opinions on these proposals. In this article, we make an effort to analyse the revised regulatory framework for listed companies that wish to repurchase securities.
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