SEBI has recently amended the existing buy back
regime (Buy Back of Securities Regulations, 1998) concerning the securities
market vide notification dated 8th August, 2013. Thus, the new buy
back regime has kicked in by the way of SEBI (Buy Back of Securities) Regulations,2013. Various changes have been introduced in the new regulations to ensure
that there is lower volatility in the capitals market. Further, the new
regulations has taken a substantial amount of flexibility and leeway, the
companies earlier enjoyed concerning the time lines attached to open market
purchase of the securities.
Now, before moving on to discuss the changes and
modifications introduced in the new buy back regime, a little understanding of
what exactly is ‘buy back of securities’ would be useful.
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Buy Back of securities basically means the purchase
of securities by a company from its existing shareholders. Thus a company
purchases backs its own share in order to reduce the number of shares in the
market. Buy back of shares is usually done by a company due to of following reasons-
i. Return
surplus cash to the shareholders
ii. Support share price during periods of
temporary weakness
iii. Increase
the underlying share value
iv. To
increase the value of shares still available (by reducing the supply)
v. To
eliminate any threats by shareholders who may be looking for controlling stake(hostile
takeover)
Now, we shall discuss the modifications and
amendments introduced by the new Buy Back of Securities, Regulations 2013.
NEED FOR THE AMENDMENT IN THE EXISTING BUY BACK REGIME
SEBI in its DISCUSSION PAPER had observed that the
existing mechanism of buy back of securities through open market has failed to
achieve its objectives in spirits. The reasons, as pointed out in the
discussion paper, are as follows-
1.
The
companies place buy back orders at their discretion instead of placing them on
regular basis and that too at a price away from the market price-
Section 77A (4) of the Companies
Act, 1956 specifies that every buy back shall be completed within a period of
12 months. Companies, instead of fixing a definitive period for buy back,
usually keep the buy back offer open for the entire period of 12 months.
However, even after keeping the buy back offer open for such a long time, there
have been instances where companies did not buy a single share or failed to
achieve the minimum buy back quantity. [Note- Section 68(1) of the new
Companies Act, 2013 correspond this section. Also, readers must be aware of the
fact that only 98 sections of the new companies act, 2013 have been notified.
Further, the framework for the ‘buy back’ regime is more or less same in the both the old act and the new act.
2.
There are
no provisions that determine the price or quantity permissible for company to
buy back-
There are no explicit provisions in
the Companies Act, 1956 or in the Companies Act, 2013 or in the SEBI (Buy Back
of Securities) Regulations, 1998 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. Therefore, on which days, for how long and in what
quantity the company will buy back its shares is entirely at the discretion of
the company's management. This lack of clarity is further burdened with the
fact that disclosure is not made to the public shareholders as to how the
discretion will be exercised and what are consideration/basis guiding the management
in this regard.
3.
Failure on
part of companies to actually execute the buy back process-
It has also been observed that many
companies took shareholders/board approval for buy back proposals and in some
cases even published public notice but did not take a single step to buy the
shares.
4.
There are
no current disclosure requirements to be fulfilled by company with regards to
buy back-
The company discloses the maximum
price only and eventually purchases the shares near market price which could be
significantly lower than the announced price. This may convey a misleading
message to the shareholders and to the market. Moreover, buy back from open
market has not proved to be beneficial to the shareholders as against the
tender offer method in which the company buys back shares at a premium to the
market price.
The amendments
and modifications introduced in the ‘Buy Back’ regime:
1. INCREASE IN
MANDATORY MINIMUM BUY-BACK: Over a course of time, it was observed by the SEBI
that buy-backs were widely employed by companies to support share price during
periods of temporary weakness. This was also done to artificially increase
underlying share value. Therefore, in a move to ensure that buy backs should
not be employed as a share-price stabilizing activity, the mandatory minimum
amount which a company is required to buy back from its existing shareholders has been increased to 50% of the offer
size, against the existing practice of 25%. In recent buyback offers, SEBI
has, in practice, insisted the companies on buying back a minimum quantity of
25%. This, however, did not prevent the manipulation of share prices. Therefore,
to effectively address such concerns, SEBI
has proposed to introduce the 50% mandatory buy-back requirement as a rule in
the Buy Back Regulations.
2. REDUCTION IN
BUY-BACK PERIOD:
The current buy-back provisions are broadly set out in the Section 77A of the Companies
Act, 1956 (Section 68(1) of the new Companies Act, 2013 correspond this). In
addition, SEBI prescribes certain standards under the Buy Back Regulations
which apply to listed companies. The regulatory requirements of the Companies
Act mandate that a company looking to buy back its securities should seek
approval of its shareholders by way of a special resolution or a resolution of
its board of directors, and such buy-back must be completed within 12 months
from the date of the shareholder/board resolution (Buy Back Period). The SEBI proposes to limit the Buy
Back Period to 6 months (from the prevailing 1 year period) from when
the approval has been sought from the board or shareholders, since it was empirically
observed by the regulator that companies did not utilize the entire period for
concluding the buy-back. However, this requirement departs from the regulatory
position under the Companies Act. The Companies Act provides that the shares
should be bought back within 12 months from the date of the shareholder/board
resolution.
But,
SEBI’s proposal to reduce the Buy Back Period is contrary to the flexibility
provided in the Companies Act. Further, absent an amendment of the Companies
Act, it is not clear if SEBI can reduce a time period that is determined by the
Companies Act.
3. ESCROW ACCOUNT
REQUIREMENT:
SEBI has introduced the requirement of creating an escrow account on part of
the companies, and a deposit has to be made as a security, to ensure that a
company which announces a buy-back goes ahead with the proposed transaction. This security shall be equivalent to 25%
of the buy-back amount. This move will be happily welcomed by the
shareholders as it safeguards their interests. But it is being widely perceived being an unnecessary burden given
the 50% mandatory buy-back rule.
4. REQUIREMENTS
AFTER COMPLETION OF BUY BACK PROCESS: Now post buy back process, SEBI has changed the duration of the
restrictive period for further issue of capital from prevailing 6 months to 1
year, to be calculated from date of closure of the buy back.
The
existing regulations (1998 regulations) do not provide for any lock in period
between two buy back offers. However, the new regulations has issued a
sub-regulation 4 after sub-regulation 3 of Regulation 4 which provides that no
offer of buy-back shall be made by any company within a period of one year from
the date of closure of the preceding offer of buy back. Further, proviso of Section 68 (2) (g) of the Companies Act, 2013 in this
regards also provides that no offer of buy-back shall be made within a period
of one year from the date of closure of preceding offer of buy-back.
5. RESTRICTION ON
DEALING IN SHARES OR SPECIFIED SECURITIES: Regulation 19(1)(e) of the buy
back regulations, 1998 has been modified so as to specifically mention the period during which the promoters or the person shall be restricted to
deal in shares or specified securities. As per the said regulation, the
promoter or the person shall not be allowed to deal in the shares or other
specified securities of the company in the stock exchange during the period or
off- market, including inter-se transfer of shares among the promoters during
the period from the date of passing the resolution relating to buyback. As per the earlier regulations, such
restriction was for during the period when buy back offer is open. Also,
no such conditions as such are prescribed in the new Companies Act, 2013.
6. TENDER OFFER
METHOD:
Other changes proposed include mandating
that buy-back of 15% or more of the total of the paid up capital and free
reserves must be done only by way of a tender offer. In a move to
increase stability of the stock price of a company and ensure that shares are
sold at a premium to the prevailing market price of the stock, SEBI intends to confine buy-back of 15% or
more of the capital to the tender offer process. This proposal appears to restrict the freedom available to
companies to determine the manner/method of the buy-back under the Companies
Act.
7. REQUIREMENTS
DURING BUY BACK:
SEBI now requires that all the information related to shares bought back to be disclosed on a daily basis
on the website of the company and the stock exchange on cumulative basis.
Before the amendment, the aforementioned disclosure had to be made on a daily,
fortnightly and monthly basis.
8. EXTINGUISHMENT
OF CERTIFICATES:
The newly inserted sub regulation 3
of Regulation 16 provides that the company shall be required to extinguish and physically destroy
the security certificates so bought back during the month in the presence of a
Merchant Banker and the Statutory Auditor, on or before 15th day of the
succeeding month. Further, the company shall ensure that all the
securities bought-back are extinguished within seven days of the last date of
completion of buyback. Earlier there was no such provision under the
regulations. The Companies Bill however, provides that the certificates shall
be extinguished within 7 days of the last date of completion of buy-back.
CONCLUSION
Thus,
the newly amended provisions by the way of SEBI (Buy Back of Securities) Regulations,
2013 has sought to protect the shareholders interests. Numerous flexibilities
available to the companies have been taken away. But, it is to be noted that some
provisions of the new regulations are in direct conflict with some sections of
the Companies Act. Therefore, the big question is whether the SEBI has the
power to override the sections of Companies Act and which one of the two would prevail
in an event of conflict.
[For any queries, i can also be contacted at- rishabh.a.09@gmail.com]
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