The Securities and Exchange Board of India (Sebi) intends to further tighten the buyback norms so that companies do not announce such offers with the sole intention of supporting their share price in the stock market.
The capital market watchdog wants listed companies to double the minimum commitment for buyback while reducing the overall tenure of the offer. Further, companies that announce buyback offers will not be able to raise further capital for at least two years post the buyback scheme.
In a discussion paper released on Wednesday, Sebi has proposed to double the minimum buyback commitment from the current 25% to 50% of the total buyback size. Sebi has invited public comments till January 31 after which it will come out with detailed guidelines based on the feedback.
Further, the regulator proposed that companies should complete the buyback in three months instead of the current practice of one year. It has also been suggested that companies should be mandated to put 25% of the maximum amount proposed for buyback in an escrow account.
According to a Sebi analysis, the last three financial years (2007-08 to 2009-10) saw a total 75 buyback offers through open market purchases in which on an average 49.91% of the maximum offer size was utilised by companies for the buyback.
This, according to Sebi suggests that ?despite the intention disclosed by companies to their shareholders at the time of making buyback offer, the buyback offer is not used as an opportunity for enhancing the book value of the shares of the company.?
Another important proposal put forth by Sebi is the restrictions on further capital raising by companies that make a buyback offer. The watchdog has proposed that companies coming out with buyback programmes should not be allowed to raise further capital for a period of two years.
?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,? stated the discussion paper.
Also, companies that do not buyback 100% of the announced buyback size will not be allowed to come with another buyback offer for at least one year. Sebi is of the view that this will ?ensure that the companies do not launch buyback programmes for stabilising the share price?.
Sebi has also proposed that if the buyback size is more than 15% of the total paid up capital and free reserves, than it must be the only by way of a tender offer method. ?The tender offer method of buyback is more equitable way of distributing surplus funds with the companies to its shareholders,? it says.
While the regulator has proposed tightening the requirements related to size and tenure of buyback, it has also suggested certain relaxations in terms of disclosures required to make on an ongoing basis during the term of the offer.
The regulator has proposed doing away with the fortnightly publication of the buyback updates. ?It is felt that the current requirement of publishing the disclosures in the news papers on fortnightly basis and every time an additional 5% of maximum shares on offer were bought back only adds to the cost of buyback programme,? stated the discussion paper.
The buyback offer will also have to include a separate window for investors that hold physical shares and shareholders with 500 or less shares in physical form would be eligible to tender in this trading window.
