SEBI Amends buy back through open market purchase

The synonym to capital market could be safely termed as “dynamic”. In dynamic situations, laws cannot afford to remain static. In order to meet the challenges of changing times, the regulators and the legislators have to pull up their socks and come out with appropriate reforms to meet the need of the hour. To meet today’s challenges qua buy back of shares and other securities, Securities and Exchange Board of India (“SEBI”) has introduced changes to the SEBI (Buy Back of Securities) Regulations, 1998 (“Regulations”) at its meeting held on June 25, 2013..Earlier this year in January, SEBI by Press Release 3 of 2013, placed on its website a discussion paper on “Proposed modifications to the existing framework for buy back through open market purchase” for public comments..Pursuant thereto, SEBI has proposed certain amendments to the Regulations, which it has shared on its website vide Press Release No. 60 of 2013 (“Press Release”)..The changes declared in the Press Release will be ultimately incorporated in the Regulations and one will then have to look at the amended regulations for fine prints and finality..The Regulations requires that as soon as the decision of buy back of securities is taken either at the board or shareholders ‘meeting, the same is to be communicated to the public by making a public announcement in at least one English newspaper. This ordinarily leads to rise in price of the scrip or specified security..Actually, if one sees, the introduction of buy back of securities in the (Indian) Companies Act, 1956 (“Companies Act”) is relatively a recent and a new concept, compared to the Companies Act itself. The concept of buy back was introduced by insertion of section 77A in the Companies Act in the year 1998, i.e. about 15 years back. Section 77A was introduced vide Companies Amendment Act, 1999 (w.e.f. 31.10.1998)..The prime reasons for prohibiting companies from buying its own shares / securities was that such purchases might enable the company, in an unhealthy manner, to influence the market price of its shares by reducing the floating stock, as buy back consequently leads to reduction in capital of a company. The proposed amendments aim to address this malady..However, this total embargo by section 77 was relaxed by introduction of section 77A, along with the induction of safeguards in the form of section 77AA and 77B..Whilst the Regulations provide for 3 modes by which a company can buy back its securities, the Press Release only provides for amendments to buy back through open market through stock exchange mechanism..The Press note 60 of 2013 provides for the following 10 amendments to the Regulations : –.i.The mandatory minimum buy – back has been increased to 50% of the amount earmarked for the buy-back, as against the existing 25%, failing which amount in the escrow would be forfeited subject to maximum of 2.5% of the total amount earmarked..This implies, that if a company decides and accordingly earmarks Rs. 1 crore, for buying back its shares, it is required to buy back shares at least to the extent of Rs. 50 lakhs. In the event the company fails, it is subject to penalization..The predominant reason being to prevent companies from buying back its securities for all the right reasons and not just merely announcing the same in order to manipulate the price in a clandestine manner..Further, it has been SEBI’s observation in its discussion paper that, companies on an average have bought back 49.96% of the maximum quantity proposed for buy-back in the financial year 2009 – 2010 and 2010 – 2011. Considering the same, SEBI has decided to mandate 50% as the minimum quantity..ii.The minimum buy-back period has been reduced to 6 months from 12 months.It has been observed by SEBI that even after keeping the buy back offer open up to 12 months, there have been instances where companies did not buy a single share or failed to achieve the minimum buy back quantity. It has been observed that the companies place buy orders at their discretion instead of placing them on regular basis and that too at a price away from the market price..The proposed amendment will now no more allow companies to just announce its decision to buy back and complete the process sluggishly and languidly. SEBI has observed that a genuine buy back takes about 6 months to complete the entire process. Hence, it now wants to set the said time frame formally by incorporating it in the Regulations..iii.The companies shall create an escrow account towards security for performance with an amount equivalent to at least 25% of the amount earmarked for buy-back..The concept of escrow has been introduced by SEBI for the first time with respect to buying back shares via the stock exchange. Whilst the provision for depositing sum of monies in an escrow account is applicable in buying back of securities through tender offer (Regulation 10 of the Regulations), there was no such provision for buying back through the stock exchange. This is a de novo introduction to Chapter IV of the Regulations. The intent behind the said introduction being that companies proposing buy back ought to be serious and unwavering about the same. As per the Mint newspaper of 27.06.2013, during 2011 and 2012, out of the 54 buy back announcements by listed companies, only 18 actually took place..iv.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. .This provision is stipulated in Section 77A (8) of the Companies Act. One of the reasons why a company buys back its shares is to return surplus cash to its shareholders. It would be contradictory if a company is required to raise further capital within 6 months of its distributing its excess reserves..v.The company shall not make another buy-back offer within a period of one year from the date of closure of the preceding offer..This, per se, cannot be termed as a new provision. Section 77A of the Companies provides for the same. However, it is now specifically proposed to be introduced in Chapter IV of the Regulations..vi.The disclosure requirements have been rationalized requiring disclosure of the shares bought back on cumulative basis on the website of the company and the stock exchange, only on a daily basis instead of the current requirement of disclosure on a daily, fortnightly and monthly basis..Currently, Regulation 15A(i) requires the company and the Merchant Bankers to submit information regarding the shares or other specified securities bought-back, to the stock exchange daily and also publish the said information in a national daily on a fortnightly basis and every time when an additional 5% of the buy back has been completed. The amendment proposes to streamline and simplify filling obligations of the company and Merchant Bankers..vii.The company can buy-back 15% or more paid up capital (paid-up and free reserves) only by way of tender offer..For buying back shares to the extent of 15% or more of the paid up capital, the company will have to resort to the procedures and obligation prescribed with Chapter III of the Regulation, which deals with Buy Back through Tender Offer (another way of buying back of shares). There was no such condition earlier..SEBI in its discussion paper on Buy Back has observed whilst proposing the change that, in open market purchase method of buy-back, which spans over a maximum period of 12 months, the shares are bought back at the prevailing market price, which changes with the market conditions. However, in tender offer method, all shares are bought back at a fixed price which is generally at a premium to the market price. Thus, the tender offer method of buy-back is more equitable way of distributing surplus funds with the companies to its shareholders..In the discussion paper, SEBI has further suggested to encourage buy-back using tender method when larger amount of the company’s surplus funds are proposed to be distributed to its shareholders..viii.Procedure for buy-back of physical shares (odd – lot) has been modified which includes creation of separate window in the trading system for tendering the shares, requirement of PAN / Aadhaar for verification, etc..In the discussion paper, SEBI has stated that physical shares in the system increase regulatory as well as servicing cost of the company. SEBI’s efforts have also been in the direction to reduce physical shares in the system. The proposed amendments aim to encourage and facilitate participation of shareholders holding physical shares in buy back program..ix.The companies are permitted to extinguish 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..The time line for extinguishment of share certificate has been slightly tweaked to introduce extinguishment of shares bought back during the month, to be done within fifteen days of the succeeding month. The remaining provision on extinguishment of share certificates stipulated in the Regulations remains the same..x.The promoters of the company shall not execute ay transaction, either on-market or off-market, during the buy – back period .Regulation 19(1)(e) which deals with “Obligation of the Company” puts an embargo on the promoters from dealing in securities in the stock exchange during the buy back period. The amendment extends the embargo on the promoters from dealing in the securities in off market also..Whilst, SEBI has spelt its preliminary decision in the Press Release, however, one will have to wait for the publication of the final amended Regulations for absolute clarity on the law and procedure..Prachi is an advocate practicing with the Chambers of Corporate Attorneys, a law firm based in Mumbai. She primarily practices in stock market and capital market related matters. She can be .contacted at prachi@corporateattorneys.in