A well-structured alternative

The Securities and Exchange Board of India has taken positive steps to regulate the buy-back process, write Harvinder Singh and Sumedha Dutta at HSA Advocates

The Securities and Exchange Board of India (SEBI) recently amended the SEBI (Buy-back of Securities) Regulations, 1998, by introducing the SEBI (Buy-back of Securities) (Amendment) Regulations, 2013, to curtail malpractices connected with open market buy-backs.

Many promoters of listed companies had used the buy-back regulations not to reward shareholders, but to prop up sagging share prices. Several kept their buy-back offers open for one year but failed to conclude or complete the buy-back process. SEBI’s amendments were introduced to control the share buy-back process, making it more structured, transparent and effective, rather than a tool for share price manipulation.

Through its amendments, SEBI has:

• Increased the mandatory minimum quantity of shares that a company is required to buy back from its existing shareholders from 25% to 50% of the offer size.

• Mandated the creation of an escrow account as security for performance, where at least 25% of the targeted buy-back amount is to be retained through the process.

• Reduced the maximum buy-back period from 12 months to six months.

• Permitted companies to buy back 15% or more of capital (paid-up capital and free reserves) only by way of tender offers, similar to a book-building process.

The amended regulations also rationalize the norms requiring disclosure (on a daily basis) of the shares being bought back on a cumulative basis on the website of the company and the stock exchanges.

Harvinder Singh is a partner and Sumedha Dutta is a senior associate at HSA Advocates’ New Delhi office. They can be reached at harvinder.singh@hsalegal.com and sumedha.dutta@hsalegal.com.