Recently, the stock exchange route for share buybacks was phased out by the Securities Exchange Board of India. SEBI through its recent amendment to the buyback rules intends to phase out the open market route for buyback which often is not reported to SEBI.
What is The Buyback of Shares?
Buyback is a process by which the company buys its own shares. The company buys its own shares for various reasons like reducing the share price in the market, for tax gains, etc. The buyback of shares is governed by the Companies Act and the SEBI regulations in the case of a listed company. Sections 68 to 70 of the Companies Act 2013 deal with provisions related to the buyback of shares by the companies The provisions pertaining to the buyback of shares by companies are covered in Sections 68 to 70 of the Companies Act of 2013. The company is permitted to purchase its own shares under Section 68 using either its free reserves, securities premium account, or the profits of any share issuance.
The company’s board of directors may additionally authorize the buyback of up to 10% of the entire paid-up equity capital and free reserves under Section 68. However, the shareholders by a special resolution can approve a buyback of up to 25% of free reserves and paid-up capital.
Methods of Buyback of Shares
There are two methods by which the company buyback its shares. The company can buy back its shares either through:
- i) Tender offer route
- ii) Open Market offer
Tender offer route
In the tender offer route, the business makes a direct offer to shareholders to purchase a specified quantity of shares at a specified price. This strategy guarantees that all owners, whether they own a majority or a minority position, will be treated similarly. In the tender offer route, the price of the shares is fixed.
Open market offer
In an open market offer, the company can purchase its shares in the open market. he corporation sets a maximum price and has the option to buy back shares at any price up to that amount. Here the price of the shares is not fixed. The company usually opts for the open market offer to reward the existing shareholders.
SEBI New Regulations
In the recent board meeting held by SEBI, it decided to phase out the open market offer of the buyback of shares by the company. Essentially the open market offer route is often vulnerable to favouritism as the company can use this as a method to reward the existing shareholders and does not provide much transparency. So now the buyback of shares by the companies can only be done through the tender offer route with a fixed price. The Board has also required that instead of the previous minimum requirement of 50%, the businesses now need to use 75% of the buyback profits made through the stock exchange mechanism. The regulator body has also reduced the timeline for the completion of buybacks through tender offers by 18 days.
The new regulation by SEBI is aimed at increasing transparency and preventing any favouritism by the companies during the buyback of shares. This is also an important step aimed at creating an egalitarian level playing field for the market players.
Written by Pratheeka
Third-Year student at ICFAI law school.