SEBI Proposes To Tighten Buyback Norms

The Securities Exchange Board of India (SEBI) has always been forthcoming when it comes to protecting investors’ interest in the equity markets. In an attempt in this direction, the board has proposed significant changes in the existing framework of share buybacks. According to a press release, the SEBI has proposed to increase the minimum quantity of share buyback to 50% of the proposed buyback and to bring down the time frame for the exercise to 3 months. At present, the minimum quantity stands at 25% of the proposed buyback and the exercise can be completed in 12 months. With this proposal, the regulator aims to tighten the norms around the buyback of shares and make the process more effective.

With regard to reducing the time frame of the buyback period, the SEBI has stated that companies that are serious about buyback programme have been able to complete a significant portion of the buyback in 3 months’ time. Hence, it is proposed that companies complete the buyback in such a period. A recent example is that of Reliance Industries, which is nearing its one-year tenure and has hardly touched a third of the proposed buyback. SEBI has provided a list of many examples where not a single share was bought back. Hence, to ensure that only serious companies launch such programmes, it is further proposed that these companies be mandated to put 25% of the maximum amount proposed for buyback in an escrow account.

In addition, it is being proposed that listed companies coming out with buyback programmes may not be allowed to raise further capital for a period of 2 years. This appears to be a valid approach, as it is understood that the companies usually launch buyback programmes when they have idle cash resources and there are no attractive investment opportunities in the foreseeable future. We feel that it is a logical step to curb unnecessary buybacks being offered by companies just to keep the stock prices up.

The best part about the proposal is that a separate window being proposed for the surrender of physical shares. The following regulations have been suggested, which would help many investors avoid the hassles they usually face:

• Creation of separate window in trading system for buying physical shares. This window will remain open only during the buy-back programme.
• Shareholders holding 500 shares or less in physical form will be eligible to tender their shares in this window (It may be noted that the trading in Odd Lot Segment on the exchange is also limited to 500 shares). Such shareholders may be permitted to tender shares to a broker designated for the purpose by the company, without the need to open a trading account or strict compliance with KYC norms. However, the requirement of PAN/Aadhar may be made mandatory for such shareholders holding shares in the physical form. 
• The shareholder can tender the shares to the designated broker directly or to the company, who can then put the transaction through the designated broker

As stated earlier, these are proposed recommendations and investors can send comments on the above framework on or before January 31, 2013 to chitrab@sebi.gov.in or anindyakd@sebi.gov.in