SEBI

SEBI (Buy-back of Securities) (Amendment) Regulations, 2023

The market regulator has implemented restrictions on trade volume and putting bids in the pre-open market, in contrast to the amendments announced. As a result of the modification made to the SEBI buy-back of securities (amendment) regulations, 2023, the market regulator, that is Securities and Exchange Board of India, has provided new operational guidance to the companies. 

The Securities and Exchange Board of India (“SEBI”) vide its notification dated March 8, 2023 (“Notification”) amended the SEBI (Buy-Back of Securities) Regulations, 2018^[1] (“Buy-back of Securities Regulations”). The modification will take effect thirty days after it is published in the official gazette. These changes are intended to speed up the buy-back process, level the playing field for investors, and encourage ease of doing business. 

Background

Buy-backs are business transactions in which corporations with extra cash purchase back their own shares from existing shareholders. Companies that purchase back shares are required by Indian regulations to cancel those shares. Due to the market’s expansion and complexity, the Buy-back of securities Rules have changed over time.

Understanding Buy-backs

A corporate move known as a buy-back of securities or share repurchase involves a company buying back its shares from its shareholders. Typically, firms repurchase their stock at a premium to the going market rate. Tender offers and open market offers are the two different kinds of buy-backs. Both of these strategies are available to businesses when they want to purchase back shares from shareholders.

The practice of buying back shares of stock from current shareholders, either through a tender offer or on the open market, is known as share buy-back. In this case, the price of the shares that are of concern is higher than the going market price.

Companies can use the secondary market to buy back shares when they use the open market mechanism. The tender offer, on the other hand, is available to those who select it by giving or tendering a part of their shares within a specified time frame. As an alternative to paying timely dividends, it is a way to reward current shareholders.

Key Amendments

Buy-back through the Stock Exchange – Restrictions on Bid Placement, Price, and Volume 

In accordance with Clause (vi) of Regulation 16 of the Buy-back of Securities Regulations, buy-back transactions through stock exchanges are subject to SEBI-specified limitations on bid placement, price, and volume. According to SEBI, the duration of the repurchase process may be shortened to 66 working days beginning in April 2023 and 22 working days beginning in April 2024. Lastly, starting in April 2025, the open market option may be closed to buy-back offers.

• The company shall not purchase more than 25% of the average daily trading volume of its shares or other specified securities in the 10 trading days prior to the day in which such purchases are made.

• Companies may not make bids in the pre-open market, the first thirty minutes, and the final thirty minutes of the normal trading session.

• Businesses should set their purchase order prices within 1% of the most recent trading price.

The circular also specifies the margin needs for escrow account deposits. According to SEBI’s current requirements, the escrow accounts must contain both cash and non-monetary items.

Escrow Account 

A listed entity must establish an escrow account for the escrow amount specified in the Buy-back Rules within two working days of the public announcement as security for the fulfilment of its obligations. Depending on SEBI’s margin requirements, the escrow account must contain one of the following: 

• Cash, including bank deposits, deposited with any scheduled commercial bank; (b) a bank guarantee issued in the merchant banker’s favour by any scheduled commercial bank.
• Frequently traded and freely transferable equity shares or other freely transferable securities.
• Government securities.
• Mutual fund units invested in gilt funds and overnight schemes.
• A combination of the above.

The listed entity will deposit 2.5 per cent of the amount designated for buy-back as security when a portion of the escrow account is not in cash. The bank guarantee won’t be given back until all of the requirements under the Buy-back Rules have been met.

According to the revised amendment

• The escrow account must be filled with cash or other assets in accordance with subclause (c) of Clause (xi) of Regulation 9 and Clause (ii) of Regulation 20 of the Buy-back of Securities Regulations.
• According to the SEBI for stock exchange and clearing corporations master circular dated July 5 2021, the percentage of an escrow account that is not cash must be subject to the appropriate haircut.
• It is advisable for the merchant banker making the buy-back offer to make sure that an adequate amount, following the necessary haircut, is available in the escrow account till the completion of all buy-back formalities.

General Amendments

• All listed entities are to be made aware of the provisions of this circular by the recognized stock exchanges, and they also disseminate the same on their websites. 

• To protect the interests of investors, encourage the development of the securities market, and regulate it, this Circular is being issued in accordance with the authority granted by Section 11 (1) of the Securities and Exchange Board of India (SEBI) Act, 1992.

• A copy of this circular under the heading “Legal Framework Circulars” is available on the SEBI website at www.sebi.gov.in.

Public Announcement 

As required by Regulations 7(i) and 16(iv) of the Buy-back Regulations, in addition to making a public announcement in newspapers, a copy of the announcement must also be electronically filed with the (SEBI) Securities and Exchange Board of India and the stock exchanges where the entity’s shares or other specified securities are listed.

What Does the Buy-back of Shares signify?

Investors assume that the announcement of an impending share repurchase indicates that the company’s future prospects are profitable. Also, it has an impact on the company’s overall stock price. For instance, investors frequently think that buying back shares from shareholders is a sign that a large company is being acquired, new and improved product lines are being introduced, etc.

Therefore, share repurchases are a hint that a company’s stock value will soon rise. Moreover, implying such promising possibilities also aids in grabbing the interest of investors who want to take advantage of such beneficial conditions.

Yet, some businesses might use this tactic if the value of their shares falls. The primary reason for doing it is to stop their capital from deteriorating any more.

Investors should consider a few elements, such as the current trends in stock prices and earnings per share, to determine the true motivation behind the stock buy-back. It will also assist them in understanding the effects of such a choice.

Such a buy-back of securities could have a variety of goals. It enables the business to increase profits per share. The buy-back of securities increases the company’s return on investment. If a company’s stock is performing poorly, it is a simple way for customers to sell it. Through this, they also prevent loss.

Conclusion

The regulator further instructed the company and its designated broker to oversee adherence to these conditions. Stock exchanges are required to monitor compliance as well. If non-compliance is discovered, the exchanges will have the liberty to impose fines or adopt other enforcement measures as they deem fit. SEBI has shortened the deadlines for closing and paying securities holders and streamlining the buy-back procedure in order to protect investors’ interests and speed up the listed businesses’ compliance processes. The modification emphasises the use of electronic filing and reporting methods in accordance with the Buy-back Rules.

Also Read:
What is Buy-Back of Securities?
Method for Buyback of Shares as per Company Act
SEBI Amends the Buyback of Securities Regulations

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