In January 2013, SEBI released a discussion paper suggesting extensive changes to the SEBI (Buy-back of Securities) Regulations, 1998. SEBI recently came out with an amendment to the regulations, which is a lenient version of the discussion paper. However, SEBI has failed to address underlying issues with the regulation of buy-backs.
The key developments include, an increase in the minimum mandatory buyback requirement from 25% to 50%, mandatory opening of buyback offer within seven working days from the date of public announcement and mandatory completion within six months, mandatory requirement to submit buyback information to stock exchanges on a daily basis, a new escrow mechanism which would hold 25% of the buyback amount, a cooling period of one year from the closure of the buyback for further capital raising or another buyback offer and an increase in the restrictions on the promoters of the company in relation to on or off market transactions.
It may be emphasised here that two classes of shareholders are impacted by buybacks a) shareholders who sell back their shares and b) the surviving shareholders of the company. Thus, any gain offered to exiting shareholders is automatically a loss to the surviving shareholders.
Buy-back under the Companies Act, 1956, is a tool in the hands of the company to support the share price during periods of temporary weaknesses. Therefore, the size of the buyback should be dependent on the needs of a company and not a mechanical statutory percentage. In fact, if the market price is above the book value of the company, every purchase it makes will be detrimental for the existing shareholders. A mandatory minimum purchase is unnecessarily restrictive and such a requirement must be removed completely as it would harm surviving shareholders whose interest should be key.