The Securities and Exchange Board of India (Sebi) has decided to phase out the buyback of shares of listed companies through the exchange route. The regulator favours the repurchase of shares by companies from shareholders on a proportionate basis through the tender offer because that is considered more equitable, transparent, and fair.
What is the stock exchange route?
Under the stock exchange route, a company can buy back shares only on the stock exchanges having nationwide trading terminals. The buyback of shares is made only through the order-matching mechanism. In this method, the promoters, or persons in control of a company are not allowed to participate.
Paytm, which witnessed a 76 per cent crash in share prices after its IPO last year, recently decided to opt for the open market route through the stock exchanges method for share buyback, which is to be completed within a maximum period of 6 months.
While TCS, which came out with share buybacks recently, used the tender route, Infosys opted for the stock exchange method for its recent buyback.
Why is Sebi against the exchange route?
As per the recommendations of the Keki Mistry-headed committee, set up by Sebi to review the buyback regulations, under the stock exchange route, there is a possibility of one shareholder’s entire trade getting matched with the purchase order placed by the company, thus depriving other shareholders of availing the benefit of buyback. This runs contrary to the principle of equitable treatment, which forms the basis of all corporate actions.
According to the Sebi chairperson Madhabi Puri Buch, the tender route is the more equitable route for buybacks. “The other routes are vulnerable to favouritism because nobody really knows that in the exchange mechanism when the company is going to come in order to buyback shares and only a few people may be aware of it, and benefits may flow to those few people. So, it (buyback through exchange) is not an equitable mechanism,” Buch said after the Sebi board meeting.
When will the exchange route be phased out?
As recommended by the Keki Mistry committee, Sebi will phase out buyback through the stock exchange route with effect from April 1, 2025. Many experts termed Sebi’s decision to phase out stock buyback through the exchange route as positive as it will give all the shareholders an opportunity to participate. The aim of this move is to make the buyback process more robust, efficient, transparent and shareholder-friendly.
What is buyback via tender offer?
A tender offer means an offer by a company to buy back its own shares or other specified securities through a letter of offer from the holders of the shares or other specified securities of the company. The buyback is done on a proportionate basis as per the buyback ratio, and the additional shares tendered over and above the prescribed buyback ratio get accepted if there are any unaccepted shares. It is a fixed-price buyback offer.
What are the changes made in the tender system?
Sebi has reduced the timeline for completion of the buyback through a tender offer by 18 days, by removing the requirement of filing a draft letter of offer with it. It also permitted an upward revision of the buyback price until one working day prior to the record date.
What is share buyback?
When a listed company buys its own shares from the existing shareholders, it is known as a share buyback, which is also called share repurchase. The process reduces the number of outstanding shares in the open market over a period which can lead to better valuation and earnings per share (EPS).
Currently, a company can buy back its shares from shareholders on a proportionate basis through a tender offer, or from the open market via a book-building process, or from the odd-lot holders. The maximum limit of any buyback is 25 per cent or less of the aggregate of paid-up capital and free reserves of a company.
How will shareholders be benefitted?
According to Yash Ashar, partner & head – capital markets, Cyril Amarchand Mangaldas, the entire process of buyback via stock markets may or may not have benefitted smaller investors as they may not have known when the buyback was taking place.
“With the tender offer process being the only process going forward, all shareholders would now be provided with an opportunity to participate in the buyback. Especially as tender offers also require a reservation for small shareholders,” Ashar said. “In a way it democratises the process and creates a fair and equitable platform,” he said.
