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Engagement with SEBI for easing provisions related to buyback of own securities
Engagement with SEBI for easing provisions related to buyback of own securities

January 25, 2022

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Globally, buyback of own shares is a key tool, in addition to dividend distribution to manage capital structure. However, the Indian regulatory framework governing buyback of own shares prescribe certain restrictive provisions, thereby limiting a company’s ability to undertake buyback flexibly. Since Indian companies are increasingly competing with global companies for global capital, it is important to amend Indian laws governing buyback and bring them at par with the global best practices.

On January 20, we engaged with Securities and Exchange Board of India (SEBI) sub-group, comprising members of the Primary Market Advisory Committee (PMAC), constituted under the chairmanship of Shri K.K. Mistry (Vice Chairman and CEO of HDFC) to review the extant provisions under the SEBI (Buy-Back of Securities) Regulations, 2018 (SEBI Buyback regulations) and the Companies Act, 2013 (Companies Act). During the meeting, we highlighted the importance of buyback of shares for the company as well as the shareholders and the need to liberalise the provisions governing buyback of shares.

NASSCOM has been advocating for these changes for some time and we had made a detailed submission to SEBI and Ministry of Corporate Affairs (MCA) on December 2, 2021 requesting amendments in the provisions under the SEBI Buyback regulations and the Companies Act. The same can be accessed from here.

The key recommendations include:

  1. Reduction in time gap between two buybacks

SEBI buyback regulations as well Companies Act mandates that an offer for buy-back of shares cannot be made within 1 year reckoned from the date of closure of preceding offer of buy-back. We have requested SEBI and MCA to reduce this time gap from 1 year to 6 months. This will provide flexibility to companies to offer buyback in case of availability of surplus funds and in absence of alternate investment opportunities. From an investors’ perspective, this should strengthen predictability of returns.

  1. Increase in maximum quantum of buyback and applicable limit for approval

As per SEBI buyback regulations and Companies Act, buyback of shares should be authorised by passing a special resolution at the general meeting of a company. Further, the maximum limit of buy-back should be 25% or less of aggregate of paid-up capital and free reserves. In this regard, we highlighted that buyback are used as a mode of distribution of surplus cash to shareholders of the Company. Hence, we have requested SEBI and MCS to increase the maximum limit of buyback as follows

  • Up to 25% - Buyback should be subject to approval from the Board
  • Between 25% - 50% - Subject to approval from shareholders, through special resolution, which should be valid for  one year.

This will provide more flexibility to the board to take appropriate decisions with regard to buybacks, based on market conditions and availability of surplus funds.

  1. Equating the buyback limit from open market through the stock exchanges with tender offer

As per SEBI buyback regulations, buyback from open market should be less than 15% of paid up capital and free reserves of the company. Open market buyback is a preferred route globally for returning cash to investors since it allows for higher accretion of Earnings Per Share (EPS) and it is cost-effective for the company. Hence, we have requested SEBI to equate the limit of buyback from open market with that of tender offer (i.e., 25% of paid up capital and free reserves of the company). In this context, we highlighted that no separate limit has been prescribed for buyback from open market through stock exchanges in the United States.

  1. Shareholders’ approval for maximum buyback price and number of shares

As per SEBI buyback regulations, a company is required to specify the maximum buy-back price in the statement that is annexed with the notice for the general meeting. However, there is generally a time lag of 3-4 months since the time of obtaining initial board approval for buyback and opening of the actual buyback offer. Due to price volatility in this period, market price of shares may increase beyond the buyback price, leading to negligible participation by public shareholders. Hence, we have requested SEBI to allow the Board of a company to fix buyback price closer to opening of buyback offer (instead of requiring companies to fix the price at the time of initial Board approval or shareholder’s approval).

Alternatively, SEBI may consider allowing companies to simultaneously file draft offer document with SEBI and to shareholders for approval. If it is not possible to implement any of the 2 options, SEBI should allow the board to revise the buyback price upwards during the buyback process. This will ensure a fair and equitable price fixation at the time of buyback.

  1. Promoter entitlement

As per SEBI buyback regulations, a company is required to announce a record date in public announcement for determining the entitlement and the names of the security holders, who are eligible to participate in the proposed buy-back offer. We have requested SEBI to consider promoter group entities as one unit, instead of individual entities, while calculating entitlement ratio. Also, SEBI should allow transfer of entitlement amongst promoters, in line with the flexibility provided under Rights Issue. This should enable increased promoter participation in the buyback. In case SEBI wants to keep the public and promoter entitlement and buyback renunciation rights at par, it may allow all shareholders to renunciate their buyback rights to their relatives. This will give equal footing to both public shareholders and promoters.

  1. Calculation of entitlement ratio

SEBI buyback regulations require a company to buy-back its shares from existing shareholders on a proportionate basis. However, 15% of the number of securities which company proposes to buy-back or number of securities entitled as per their shareholding, whichever is higher, will be reserved for small shareholders. In this regard, we have requested SEBI to allow companies to round off the entitlement to the nearest round figure, rather than odd numbers. This will result in simplification of entitlement computation.

We hope you will find the update useful. We will keep you posted on further developments in this regard. For more information, write to tejasvi@nasscom.in.


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