Stricter buyback, pref issue norms on the anvil

Stricter buyback, pref issue norms on the anvil

Move aimed to protect retail investors

To safeguard interests of retail investors, market regulator Securities and Exchange Board of India (Sebi) plans to streamline the procedures for buyback offers made by promoters and the issuance of shares on preferential basis.

For buyback offers made by promoters of listed companies, appropriate measures need to be taken for keeping under check non-serious proposals made to minority shareholders, while the time frame for such offers also needs to be shortened, a senior official at Sebi said.

Besides, Sebi is amending norms for preferential allotment of shares by making it mandatory to disclose source of funds for such purchases to ensure that shares are not being acquired by promoters through front entities.

The regulator may also make it mandatory that payment for such share allotments are made only from the own bank accounts of the buyers. It is also considering making it compulsory to carry out such allotments through demat accounts, a move that would check flow of illicit funds.

Steps to be initiated to bring about the changes are likely to be considered at the Sebi board meeting scheduled for Tuesday.

Regarding buyback proposals, the market regulator is planning to make it mandatory for companies to buy back a minimum of 50 per cent shares of the total targeted amount, failing which penal actions might be taken against them.

In the past three years, there have been 75 buyback cases through open market purchases, where companies could meet only 49.91 per cent of their buyback targets.

To ensure that only serious companies launch buybacks, Sebi might make it compulsory for companies to keep 25 per cent of the proposed repurchase amount in an escrow account.

Sebi also plans to shorten the time frame for share repurchase programme to six months, from one year presently.

According to an official, companies could be required to make public the number of shares purchased and the amount utilised on a daily basis.

The companies that fail to meet the buyback target could also be restrained to come up with another offer for one year.

In a bid to encourage buybacks using tender method, where larger amount of surplus funds are involved, Sebi is planning to make mandatory to buyback at least 15 per cent of targeted amount. At present there are two routes by which a company can come out with a buyback - open market and tender offer.

In open market offer, companies can buyback shares from shareholders without knowing the buyer, while tender offer involves the company writing to its shareholders individually to know their willingness for sale of shares in the buyback. Under the tender offer, shares are bought back at a fixed price, which is generally at a premium to the market price. Companies can “extinguish or destroy” shares bought back during the month, on or before fifteenth day of the succeeding month. 

In the last month of offer period, repurchased shares need to be extinguished within seven days of the completion of the offer.