SEBI

SEBI Amends the Buyback of Securities Regulations

The Buyback of Securities is regulated by SEBI through the SEBI (Buy-Back of Securities) Regulations, 2018^[1], which were enacted with the purpose of streamlining the buyback of securities with recognized stock exchanges along with providing guidelines regarding disclosure requirements,  eligibility criteria and other related matters for issuers, intermediaries and stock exchanges

Recently, the board vide its notification SEBI/LAD-NRO/GN/2023/120; dated 07.02.2023 has made amendments to these regulations. The present article shall focus on the key aspects discussed in the amended Buyback of Securities Regulations.

Introduction of the definition of ‘frequently traded shares

The very first amendment in the Buyback of Securities Regulations is with regard to the introduction of a new definition of frequently traded shares. It shall have the same definition as provided in SEBI (SAST) Regulations, 2011, where frequently traded shares’ refers to the target company’s shares in which the traded turnover on any stock exchange during the 12 calendar months preceding the calendar month in which the public announcement is required to be made under these regulations, is at least 10 %  of the total number of shares of such class of the target company.

Buyback limits will be on the basis of the company’s standalone ‘or’ consolidated financial statements.

Currently, all the limits, inclusive of the maximum limits under regulation 4(i), are on the basis of the company’s standalone as well as consolidated financial statements. However, as per the new Buyback of Securities Regulations, the limits shall be based on the company’s standalone or consolidated financial statements, whichever reflects a lower amount.

SEBI in the verge of  introducing buyback from the open market through the stock exchange

 At present the buyback from the open market must be < 15% of the paid-up capital and the company’ s free reserves. Now, the new Buyback of Securities Regulations has prescribed new limits for this buyback. It shall be less than:

• 15%  of the paid-up capital and free reserves of the company till March 31, 2023;
• 10 per cent of the paid-up capital  & free reserves of the company till March 31, 2024;
• 5% of the paid-up capital and free reserves of the company till March 31, 2025

The board has also clarified that buy-back from the open market via the stock exchange won’t be allowed wef April 1, 2025.

Further, there has been a notification of an amendment in regulation 17(i), wherein from now on, the buy-back offer won’t be open after the completion of  4 working days from the record date and would be closed:-

• Within a period of 6 in case  the buy-back offer is opened on or  prior to 31.03.23
• Within a period of  66 working days if the buy-back offer is opened on or after 01.04.23 and till 31.03.24  and
• Within a period of  22 working days,  in case the buy-back offer is opened on or  later than  01.04.24  and till March 31, 2025

Non-Allowance of Buyback via odd  for carrying out a buyback

A company was allowed for carrying out buyback by the tender offer, from the open market by book-building process or stock exchange and from odd-lot holders. SEBI has provided for an amendment in Regulation 4(iv) in the amended Buyback of Securities Regulations. The Buyback from odd-lot holders has been eliminated from the allowed methods of carrying out buyback.

Requirement of Prior consent of lenders in case of a breach of any covenant prior to the buyback offer

The company wasn’t  authorized for any buy-back unless:

• The buy-back is authorized by the articles of the company
• A special resolution is passed at a GBM

According to the amended Buyback of Securities Regulations, the SEBI has also mandated the obtainment of the lender’s prior consent in case of a breach of any covenant with such lender. Now, compliance with all the conditions is required.

Changes in Certain Timelines

Regulation 8(i) required the company to file the letter within 5 working days of the public announcement with the Board, a  draft letter of offer through a merchant banker not associated with the company and a certificate of insolvency.

 As per the amended Buyback of Securities Regulations, there has been an omission of the word draft by the board in regulation 8(i). From now on, the company   shall file the letter within 2  working days

Also, a certificate which has been issued by the merchant banker,  not being an associate of the company, a certification must be obtained from the merchant banker certifying that the buy-back offer is in compliance with buyback regulations and that the letter of offer contains the information required along with the offer letter.

Further, the offer for buy-back shall remain open for a period of 5 working days instead of 10 working days, and the date of the opening of the offer won’t be later than 4 working days from the date of record.

The company must give back the remaining shares or other specified securities to the holder of such securities within a period of   5 working days of the closure of the offer.

Changes in the Constituents of the Escrow account

The constituents of as escrow account used to be –

• Cash deposited with an SCB, or
• Bank guarantee  favouring  the merchant banker, or
• Deposit of acceptable securities with an appropriate margin with the merchant banker, or
• A combination of all of the above

Regarding the cash inclusive of bank deposits that have been deposited with any SCB, there shall be a replacement in points  (i), bank guarantee would be favouring of any merchant banker by any ‘SCB   and in point (iii), replacement of acceptable securities with frequently traded and freely transferable equity shares or other freely transferable securities. Along with this, the utilization of units of mutual funds which are invested in gilt funds and overnight or government securities can be done as per the amended Buyback of Securities Regulations.

 The new constituents of the  escrow account  stated  in the buyback regulation shall now consist of the following:

1. Cash, inclusive of bank deposits deposited with any scheduled commercial bank
2. Bank guarantee favoring the merchant banker by any SCB
3. Frequently traded and freely transferable equity shares  deposits or any other freely transferable securities with the merchant banker, or
4. Government securities
5. Units of mutual funds which are invested in gilt funds and overnight schemes
6. Combination of the above-mentioned constituents

Extinguishment and Destruction of the securities certificates in the presence of the Secretarial Auditor

There used to be a requirement of Extinguishment and Destruction of the securities certificates by the company so bought back when the registrar is present to an issue or the Merchant Banker and the Statutory Auditor within a period of 15 days of the date of acceptance of the shares or other specified securities.

The new Buyback of Securities Regulations provides that the Secretarial Auditor, instead of the statutory auditor, must be present. Also, there is a reduction in the due date from 15 to 7 working days. The company shall also be required to provide a certificate to the Board for the same,  which must be duly certified and verified by the secretarial auditor instead of the statutory auditor.

Extension of the minimum earmarked amount for buyback via open market route

The company was earlier required to ensure the utilization of at least 50 % of the amount earmarked for buy-back for buying-back shares or other specified securities. The new buyback of securities regulations provides for an enhancement in this limit from % has been enhanced to 75 %. Also, the company must ensure the utilization of at least 40 % of the amount earmarked for the buy-back within the initial half of the specified duration.

Filing requirements Disclosures and timelines for buy-back by the book-building process

The board notified new regulations 22A, 22B, 22C, 22D and 22E for filing requirements,  disclosures and timelines for buy-back through the book-building process of the present amendment. Some of the important aspects are

•  Appointment of a merchant banker by the company and making a public announcement of the same within a period of 2 working days from the date of the Board’s or shareholders’ approval.
•  Commencement of the book-building process within seven working days from the public announcement date
• The public announcement must contain the detailed methodology of intimation required to be made before the opening of the buy-back offer.
• Disclosure of the maximum buy-back price, i.e. the price range’s upper end and the book value of the shares or the other specified securities by the company.
• Publication of the offer opening announcement by the company on the date of commencing the buy-back of securities.
• The buy-back price would be dependent on the price discovered via the bids received from the shareholders within the price range.
• The completion period for payment of consideration shall be within 5 working days from the date of closure of the buy-back offer.
• The option of bidding at the buy-back price will be provided to retail investors.
•  A minimum of 2 trading days shall be provided for the buy-back offer, and it shall remain open for those days.

Conclusion

The amendments in the buyback of securities regulations, such as the introduction of new definitions, disclosure, filling and other requirements and changes in respect of escrow accounts can provide the required clarity on such concepts. Along with this, the changes in the timelines can help the companies be updated with the recent developments, thereby preventing any delays and defaults and ultimately simplifying the buyback of securities.

Also Read:
Method for Buyback of Shares as per Company Act
Process for Buyback of Shares as per Companies Act 2013
Buyback of Shares – Key Considerations under Corporate Law

SEBI-Buyback-Amenedment-2023