New Norms for Buy Back Through Open Market Purchase

With an intent to streamline the regulatory framework with the dynamic business environment and at the same time ensuring the transparency and interest of varied stakeholders, the Capital Market Regulator, SEBI in its Board meeting dated June 25, 2013 has taken certain important decisions.
A gist of the important decisions and their analysis are outlined as follows:
1.
New Norms for Buy Back through Open Market Purchase:

In order to align regulatory requirements with the changing market realities as well as to enhance efficiency of the buy-back process, SEBI has approved the following changes for buyback of shares or other specified securities from the open market through stock exchange mechanism:

i.
Mandatory Creation of Escrow Account

With a view to ensure that only the Companies having stern approach shall come out with the Buy Back, SEBI has mandated creation of an escrow account with an amount equivalent to at least 25% of the total amount earmarked for buy-back.
ii.
Minimum Buy-Back Quantity increased to 50% from 25%

After observing varied instances where Companies came out with a Buy Back Announcement through open market route to stabilize price, but actually not buying back a single share or buying very few shares and its impact on the Capital Market, the mandatory minimum buy-back threshold has been enhanced from 25% to 50%, failing which amount in the escrow account would be forfeited subject to a maximum of 2.5% of the total amount earmarked.
iii.
Maximum period to complete the Buy-Back reduced to 6 months from 12 months

On an analysis of the buy back data for FY 2009-10 and 2010-11, SEBI had observed that the companies on an average had bought back around 62% of the proposed buyback size, out of which around 49% were bought back in the first 3 months itself. Thus, it was suggested that the Companies may not need such a long period to complete the buyback offer although Companies Act, 1956 provides for 12 months. Accordingly, SEBI has now decided that the Maximum buy-back period be reduced to 6 months from 12 months.
iv.
Increase in restricted period to 1 year from the existing 6 months for further issue of capital

Since the Buy Back programs are generally launched when companies have idle cash resources and there are no attractive investment opportunities in the foreseeable future. Accordingly, considering that in mind it has been provided that the company shall not raise further capital for a period of one year from the closure of the buy-back except in discharge of subsisting obligations as against the existing 6 months as provided in Section 77A (8) of Companies Act, 1956.
v.
No further Buy Back for a period of 1 year

In order to curtail the fraudulent intention of the Promoters, SEBI has restricted the listed entities to come out with another buy-back offer within a period of one year from the date of closure of the preceding offer.
vi.
Rationalization of ongoing disclosure requirements

The disclosure requirements have been rationalized wherein the Companies will be required to give disclosure of the shares bought back only on   their websites and to the stock exchange(s)only on a daily cumulative basis, thus doing away with the extant requirement of newspaper publications. .
vii.
Limit for Open Market Method

In tender offer method, all shares are bought back at a fixed price which is generally at a premium to the market price unlike Open Market Method. Thus, it is more equitable way of distributing surplus funds to the shareholders including minority shareholders. Therefore, in order to encourage the Tender Offer, SEBI allowed the Companies to buy-back 15% or more of capital (paid-up capital and free reserves) only by way of tender offer.
viii.
Modification in the Procedure for buy-back of physical shares

In open market purchase method of buy-back, there are many barriers for holders of physical shares to participate in buy-back program. Therefore, in order to mitigate the problems faced by the holders of physical shares, SEBI has modified  the Procedure for buy-back of physical shares (odd-lot) including creation of separate window in the trading system for tendering the shares, requirement of PAN/Aadhaar for verification, etc.
ix.
Extinguishment of shares

Extinguishment of shares bought back during the month, within fifteen days of the succeeding month subject to the last extinguishment within seven days of the completion of the offer.
x.
Restriction on Promoters

In order to ensure the accomplishment of objective of Buy-Back not just in letter but in spirit as well, SEBI has restrained the Promoters of the Company to execute any transaction, either on-market or off-market, during the buyback period.
2.
Rationalized Preferential Issue Norms:

With a view to enhance transparency, ensure adequate audit trail and apply lock-in for the shares allotted in preferential issues, the Board approved the following:

i.
Preferential issue shall be subscribed only through the allottee’s own bank account. Further, the issuing company shall disclose the ultimate beneficial owner of allotted shares. Under the extant Regulations, it has not been provided in explicit terms, so some of the Companies were taking advantage of the loophole and making the payments through backdoor channels.
ii.
Allotments in preferential issues shall only be made in dematerialized form. Under the existing Regulations, although the pre preferential holding is needed to be held in demat mode, but the fresh allotment being made under the Preferential Allotment could have been made in physical as well. Now, this system of physical allotment has been done away with.
iii.
Shares allotted in the preferential issue shall not be transferred till trading approval is granted for such shares by the stock exchanges. Further, the lock-in period shall commence on the date of such trading approval. This might lengthen the lock in period, where in a case, the issuance of trading permission gets delayed for any reasons beyond the control of the Company, say non adjudication of Stamp Duty/ any dispute arising with any party etc. The situation might further aggravate, in case of allotments to Promoters, where already the lock in requirement is of 3 years from the date of allotment. In such a case, 3 years from the date of trading approval might act as a hurdle.
3.
Allowing Start-Ups and SMEs to list on Indian bourses without IPO:

With an aim to encourage entrepreneurship in the country, Market Regulator has approved the proposal to permit listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without coming out with an IPO.

SEBI’s endeavor to address the practical concerns of Start-Ups and SMEs is considered as a convivial step that will surely smoothen the exit options for informed investors like Angel Investors, VCFs and PE etc. on one hand and will provide better visibility, wider investor base and open avenues for raising funds by such companies on the other.

Main highlights of the proposed SEBI’s endeavor for Startups and SMEs are:

1.
Allowed listing on ‘Institutional Trading Platform’ (ITP) of the Stock Exchanges that would be accessible to the informed investors only.
2.
Minimum corpus for trading or investment on the ITP will be Rs. 10 Lacs thereby providing exemption to such Companies from complying with the minimum public threshold of 25%.
3.
Fund raising for the Companies listed on ITP can be done only via Private Placements.
4.
New Norms for Angel Investors:

With an intent to encourage funding by angel investors in Start-Ups and SMEs and at the same time ensuring the authenticity of the investments, SEBI has brought such investors under the ambit of Alternate Investment Funds Regulations wherein a framework for registration and regulation of angel pools has been approved to include a sub- category 'Angel Funds' under Category I- Venture Capital Funds.

The key salient features are as follows:

i.
Individual angel investors shall be required to have net tangible assets of atleast Rs. 2 crore along with :

(a)
early stage investment experience; or
(b)
experience as a serial entrepreneur; or
(c)
10 years experience as a senior management professional.
ii.
Corporate angel investors shall be required to have Rs. 10 crore net worth or be a registered AIF/VCF.
iii.
Angel Funds shall have a corpus of at least Rs.10 crore (as against Rs. 20 crore for other AIFs) and minimum investment by an investor shall be Rs. 25 lakh (may be accepted over a period of maximum 3 years) as against Rs. 1 crore for other AIFs. Further, the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5% of the corpus or Rs. 50 lakh, whichever is lesser.
iv.
For ensuring investments are genuine angel investments, angel funds shall invest only in investee companies which:

(a)
are incorporated in India and are not more than 3 years old;
(b)
have a turnover not exceeding Rs.25 crore;
(c)
are unlisted;
(d)
are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs.300 crore; and
(e)
has no family connection with the investors proposing to invest in the company.
v.
Investment in an investee company by an angel fund shall be not less than Rs.50 lakh and not more than Rs.5 crore and shall be required to be held for a period of at least 3 years.
5.
Rationalized foreign investment routes:

With a vision to attract a large number of foreign investors to Indian capital markets, SEBI has approved wide-ranging changes on the basis of recommendations of Committee on “Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”.

The summary of the recommendations accepted by the SEBI are as follows:

i.
Simplified and uniform entry norms for foreign investors by merging existing FIIs, Sub Accounts and Qualified Foreign Investors (QFIs) into a new investor class to be termed as “Foreign Portfolio Investors” (FPIs).
ii
To operate in Indian Markets, prior direct registration of FIIs and Sub Accounts with SEBI be done away with.
iii
FPIs would be categorized into 3 categories:

a)
Category I  Low Risk which would include Government and Government related entities such as Foreign Central Banks, Sovereign Wealth Funds, Multilateral Organizations etc.
b)
Category II  Moderate Risk which would include regulated entities such as Banks, Asset Management Companies, Broad Based Funds such as Mutual Funds, Investment Trusts, Insurance and Reinsurance Companies, University Funds, Pension Funds and University related Endowments already registered with SEBI.
c)
Category III  High Risk which would include all other FPIs not eligible to be included in the above two Categories.
iv.
Any portfolio investments would be defined as investment by any single investor or investor group, which shall not exceed 10 per cent of the equity of an Indian company.
6.
Single Self Regulatory Organization (SRO) for Distributors of Mutual Fund Products

In order to remove complexities and duplications, SEBI has approved the proposal to have single SRO for Distributors of Mutual Fund Products. Further, to facilitate the recognition of single SRO for Distributors of Mutual Fund Products and to avoid delay, it has been decided to have a cut off time for accepting applications for being recognized as SRO.
7.
Direct Trading by Asset Management Companies in Debt Segment of Stock Exchanges:

SEBI has granted permission to asset management companies managing schemes of mutual funds to take membership of debt segment of stock exchanges under 'Proprietary Trading Member' (PTM) category to undertake trades directly on behalf of such schemes managed by them.
Apart from the aforesaid decisions, SEBI has also taken decisions on various aspects related to Mutual Funds, Stock Brokers Registration for debt segment and Stock Exchange & Clearing Corporations. 
CP Comments:
In our view, SEBI’s decisions are a welcome move to control the manipulative activities going on in the markets under the garb of buy backs/ preferential allotments. Further, allowing of SMEs and start ups for listing without an IPO, would further assist the start ups to fill up the gap between their market presence and their fund requirements.
Contact Person
Ms.Anjali Aggarwal
Vice President
+911140622230, +919971673336,
Email:-anjali@indiacp.com
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