BuyBack Process of securities to Become Simple, as Securities Exchange Board of India has proposed measures to streamline the process. It aims to make process robust, efficient, and transparent and shareholder friendly.
So what exactly is the BuyBack Process?
Let’s understand it with an example
- Suppose a company named ABC has announced BuyBack Process for its shares from the market. Here the company has excess cash through which the company purchases its own shares from the market.
- This exactly is called Buyback of shares. The reason why the company chooses to Buy back its own shares from the market could be : To increase Earning Per share, To increase Promoter Holdings, To support share price, To pay surplus cash to the shareholders
- Companies usually choose to buy back its own shares when they feel that their company is undervalued. There are 2 methods through which company can do this Tender offer Buyback and the second one is Open Market Buy Back.
Tender Offer Buy Back
- In Tender Offer Buyback the company announces a record date. On that particular record date if the investors holds shares in their Demat account only those investors can participate in Tender Offer Buyback scheme.
- So in order to participate in the Tender offer Buyback one needs to purchase the shares 3 days before the tender offer buyback record date.
- Usually the Companies buyback the shares at the value higher than the current market price. Because no doubt that investors would not be interested otherwise to sell their shares.
- So here company extends a time period of 10 days to the shareholders to sell the shares back. It is not necessary that the entire shares of the investors is purchased back by the company.
- Suppose if ABC has announced 5 Lakh shares Tender offer Buy Back but company has received 10 lakh shares for buyback. Here company will purchase only 50% shares from each investor which would tally to 5 lakh shares.
Open Market Buy Back
- In case of Open Market BuyBack Process companies purchase the shares from the Exchanges like any investors do. The company fixes the number of shares and buy back price limit while announcing the buyback of shares
- Company has to buy back the decided number of shares within 6 months’ time. Suppose Company ABC announces Buy Back of shares from the market. Currently the share price is Rs 50 and it assures to buy back the shares at Rs 70 from the exchange.
- If in this case share price goes above Rs 70, then the Company would stop buying back its shares.
SEBI Proposed New Steps to Simplify Share Buyback Process
- Capital Market Regulator SEBI proposed measures to streamline the BuyBack process of the securities from the Open Market with the aim to make process simpler, robust efficient, transparent and shareholder friendly.
- SEBI has proposed to reduce the time limit and the time period for completion of the buyback offer under the stock exchange mechanism.
- Further, a separate window on the stock exchange may be created for undertaking buyback through this route.
- As per the current rule the buyback of shares from the open market through stock exchanges should be less than 15 per cent of the paid up capital and free reserves of the company based on both standalone and consolidated financial statements of the company.
- A time period of 6 months as we said earlier is provided from the date of opening and closure. This may result in artificial demand being created for the relevant company’s shares during such an extended period of time and trading of shares occurring at an exaggerated price.
Proposed Changes
- The new framework proposes to cut the time period taken for completion of buybacks, enhance the amount companies can repurchase their free reserves and reduce the cooling-off period between two
- The committee has suggested that companies should be allowed to undertake two buybacks during a 12-month period as opposed to just one at present. To reduce the time period of buyback, from the current six months, to 66 working days from April 2023.
- The regulator has also prescribed increasing the minimum threshold for buybacks through the open market route to 75 per cent from the current 50 per cent. This is the threshold that companies have to mandatorily utilize from the amount earmarked for buy-back.
- Currently, companies can buyback only 25 per cent of the paid-up capital and free reserves under the tender route. Sebi has proposed an increase in it to 40 per cent.
- The move will help companies return a greater amount to shareholders in the form of buyback.
- The proposal aims to prevent companies from announcing buy-backs in cases where there is no real intention to complete the buy-back for the entire amount announced.
- These proposals came as SEBI has been receiving several suggestions and representations from market participants requesting for a review of certain substantive provisions pertaining to the buyback of specified securities, buyback through tender offer as well as from open market through stock exchange mechanism.
