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SEBI and MCA: Suggestions towards easing provisions related to buyback of own securities

Globally, companies have been resorting to buyback of their own equity shares to return surplus cash to shareholders. It is increasingly being preferred by companies over dividends as a tool to manage capital structure, thereby resulting in increase in Earnings Per Share (EPS) and increase in value for shareholders. This is evident from the fact that US companies distributed USD 6 trillion in buybacks vis-à-vis USD 4 trillion in dividends between 2010 and 20191. Even Indian companies have increasingly announced buybacks. During fiscal year 2021, 61 companies have offered to buy back shares worth INR 392.9 billion, whereas in 2020 and 2019, 52 and 63 companies announced buybacks amounting to INR 199.7 bn and INR 555.9 bn respectively.

The Indian regulatory framework governing buyback of shares varies significantly from the framework prescribed by the United States of America (USA) under US Securities Exchange Act of 1934 (US Act). The US Act provides flexibility to USA companies to commence open market buyback programs at nearly any time without restrictions. As a result, there are more buyback announcement in USA. Since Indian companies are increasingly competing with global companies for global capital, it would be beneficial to amend Indian laws governing buyback.

In this regard, we have made a submission to Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI) on December 2, 2021 requesting them to review provisions relating to buyback of shares under the Companies Act, 2013 (Companies Act) and SEBI (Buy-Back of Securities) Regulations, 2018 (SEBI Buyback regulations) as follows:

S.No.

Issue

Suggestion

Rationale

1.

Time gap between completion of buyback and announcement of new buyback

Remove time gap between date of closure of preceding offer of buyback and announcement of subsequent buyback. This will allow companies to undertake buyback depending on the needs of business.

Removal of current time gap of 1 year will provide flexibility to companies to offer buyback in case of availability of surplus funds and in absence of alternate investment opportunities. This will also help investors by strengthening predictability of returns. Other provisions in SEBI buyback regulations and Companies Act such as no change of control, enhancement in promoter shareholding, minimum public shareholding norms, debt-equity norms, maximum quantum of buybacks, among others, can continue to apply.

2.

Maximum quantum of buyback and applicable limit for approval from the board of directors or members of the Company

Increase maximum limit of buyback that can be undertaken by a company as follows –

– Board of Directors – Up to 25%

Shareholders, through special resolution – 25 – 50%

Further, approval from shareholders for undertaking buyback should be valid for a period of one year. This will authorise board of directors of the companies to announce buybacks within the limit approved by shareholders.

Buybacks are used as a mode of distribution of cash to shareholders of the Company. Increase in maximum quantum of buyback will provide more flexibility to the board to take appropriate decisions with regard to buybacks.

Blanket approval from shareholders will provide flexibility to the board of directors to announce buybacks based on market conditions and availability of surplus funds.

3.

Equate the limit of buyback from open market through stock exchanges with that of tender offer

Equate the limit for buyback from open market through the stock exchanges to that of tender offer.

Open market buyback is the preferred route globally for returning cash to investors since it allows for higher accretion of EPS and it is cost-effective for the company. Hence, there is a need to equate the limit of buyback from open market with that of tender offer.

In order to prevent misuse, companies undertaking buybacks from open market through stock exchanges are anyways required to make daily disclosures of shares bought back. Further, other details such as maximum buyback size, maximum buyback price, date of commencement of buyback, date of expected closure of buyback are disclosed upfront prior to actual buyback taking place.

4.

Shareholders’ approval for maximum buyback price and number of

Allow Board of a company to fix buyback price closer to opening of the buyback offer, instead of requiring companies to fix the same at the time of initial Board approval or shareholder’s approval. At the most, SEBI may prescribe the requirement of shareholders’ approval for fixing the maximum buyback amount/ budget.

Alternatively, SEBI may consider allowing companies to simultaneously file the draft offer document with SEBI as well as to the shareholders for their approval. SEBI can give its approval subject to shareholder approval being in place. This will help in reducing the overall time gap between initial Board approval for buyback and opening of buyback offer.

There is a time lag of 3-4 months since the time of obtaining initial board approval for buyback and opening of the actual buyback offer. This is due to the fact that companies are required to first obtain approval from its shareholders’ and then from SEBI before commencement of buyback.

During this time, there may be price volatility due to proposed buyback announcement or declaration of quarterly results by listed company, amongst others. In such scenario, market price of shares may increase beyond the buyback price, leading to negligible participation by public shareholders. Further, promoters have to participate in buyback because of disclosed intention of such participation, leading to inequitable distribution of surplus funds between public shareholders and promoters.

5.

Promoter entitlement

For the purpose of calculating entitlement ratio, promoter group entities be considered as one unit, instead of individual entities.

Further, SEBI should allow transfer of entitlement amongst promoters, in line with the flexibility provided under Rights Issue.

Considering promoter group entities as one unit for the purpose of buyback will result in increased promoter participation in the buyback having following benefits:

  1. maintaining promoter and public shareholding in the company similar to pre- buyback levels by transferring entitlement from promoters who do not want to participate in the buyback to other promoters who want to participate in buyback.
  2. If some promoters do not participate, there is a possibility of breaching the minimum public shareholding limit
  3. Promoters, some of whose entities are involved in philanthropy, can manage their buyback participation in a way that such promoter entities involved in philanthropy gets higher entitlement for their philanthropic entities thereby resulting in higher contribution to the society which serves the larger good of the country and help mobilising higher funds for Corporate Social Responsibility.

Further, if 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.

6.

Entitlement Ratio

Allow companies to round off the entitlement to the nearest round figure, rather than odd numbers.

Rounding off of the entitlement ratio to the nearest number will lead to simplification of entitlement computation resulting in increased participation and a smaller number of complaints, especially for retail and small shareholders.

We hope you will find the update useful. We will keep you posted on further developments.

For more information, please write to tejasvi@nasscom.in

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