Discussion paper on review of framework for buy back through open market purchase

On the basis of detailed data compiled and analysed by SEBI, It has observed that Buy back of shares through open market has not been able to achieve the desired purpose. It observed that the main reasons attributable for the same are: 

• Inspite of the buy backs offers remaining open for the entire 12 month period, in many a case, companies have not bought a single share. 

• Placing of buy orders at companies’ discretion instead of placing them on regular basis, and that too at a price away from the market price.

• Non provisioning in the Companies Act/ SEBI regulations regarding the price or quantity for which the company shall place orders for buying back its shares or the periodicity of placement of such orders, thus providing the companies a lot of discretion, with no disclosure requirements. 

• In many cases, companies obtained the Board/ shareholders approvals for the buy backs, but did not proceed further. 

• The Companies disclose the maximum price only and eventually purchase the shares near the market price, thus conveying a misleading message to the public & markets. 

For the above reasons, SEBI thought it pertinent to make few modifications to the existing Buy Back provisions.

Key Highlights of the proposed modifications for buy back through open market purchase are given below:

1) The minimum Buy Back quantity is proposed to be mandated as 50%. 

2) The companies should complete the Buy Back in 3 months. Further it is also proposed that the companies should be mandated to put 25% of the maximum amount proposed for the buy back in an escrow account. 

3) Listed companies coming out with buyback programs will not be allowed to raise further capital for a period of 2 years. 

4) The companies who are not able to buy back 100% of the proposed amount (or the proposed maximum number of shares) may not be allowed to come with another buyback for a period of at least one year irrespective of the mode of approval for buy back. 

5) Various disclosure requirements will also be rationalized: 

• The requirement of fortnightly publication should be waived off. 
• The company shall disclose the number of shares purchased and the amount utilized to the exchanges on daily basis. 
• The company shall disclose the following details regarding the buyback offer to the exchanges on monthly basis and also include the same while publishing quarterly and annual results: 

 a. Total number of shares proposed to be bought back in the offer. 

 b. Cumulative number of shares bought back till the end of previous reporting period and amount utilised for the same. 

 c. Number of shares bought back during the current reporting period and amount utilised for the same. 

 d. Cumulative number of shares bought back till the end of the current reporting period and amount utilised for the same (b+c). 

 e. Number of shares yet to be bought back and amount yet to be utilised. 

 f. Cumulative number of shares extinguished and destroyed till the end of previous reporting period. 

 g. Number of shares extinguished and destroyed during the current reporting period 

 h. Cumulative number of shares extinguished and destroyed till the end of the current reporting period (f+g). 

6) Buy back of 15% or more of (paid up capital + free reserves) must be only by way of a tender offer method. 

7) Following changes are proposed for the procedure of buy back of physical shares (odd lot) in Open market Purchase method: 

• Separate window in trading system for buying physical shares that will be open only during the buyback program. 
• Shareholders holding 500 shares or less in physical form will be eligible to tender their shares in this window. 
• Shares can be tendered to a broker designated for such purpose, without the need to comply with KYC norms or to open a trading account. However, PAN/ Aadhar may be a mandatory requirement for such shareholders. 
• Buy-back price for such shareholders may be volume weighted average price (VWAP) of the shares bought (in the normal segment) during the calendar week in which such shares were received by the broker. In case no shares were bought back in the normal market during the aforesaid week, the last week when the company has bought may be considered. 

8) The issuance of shares arising out of Employee Stock Option schemes may be allowed during the buyback period subject to the following: 

• The shares are not allotted to directors and key managerial personnel of the company. 
• There is no acceleration in the vesting period. 

9) Extinguishment of shares in open market purchase method of buyback: 

• The companies shall extinguish/destroy shares bought back during the month, on or before fifteenth day of the succeeding month subject to the companies destroying the bought back shares in the last month within seven days of the completion of the offer. 
• The existing requirement of furnishing a separate certificate by the company to SEBI in this regard may be done away with. 

10) The restriction on the promoters of the company with respect to dealing in the shares or other specified securities of the company in the stock exchange during the period the buy-back offer is open has been extended to securities in the off-market as well. 

To the above proposed modifications, SEBI has sought Public Comments. We, at our end propose to compile the suggestions/ views from Peer Professionals as well as Industry circuits. Thus, we seek your views/suggestions on the same so that a valuable document can be provided to SEBI. 

Suggestion can be mailed to ruchi@indiacp.com by 31st January 2013, Noon.

Click here to download the Discussion Paper.