[Key Highlights] SEBI brings Changes to Buy-Back Norms

Authored by Taxmann’s Advisory & Research (Corporate Laws)

Table of Contents

1. SEBI introduces the definition of ‘frequently traded shares’

2. Buyback limits shall now be based upon standalone ‘or’ consolidated financial statements of the company

3. SEBI in the verge of rolling out buyback from open market through the stock exchange

4. ‘Buyback via odd lots’ is no longer be  allowed for carrying out buyback

5. Prior consent of lenders is required in case of a breach of any covenant before buyback offer

6. Board can now increase the buyback price and decrease the number of securities

7. Board reduces the due date to file letter offer, from 5 days to 2 days; various other timelines changed

8. SEBI notifies changes in constituents of the Escrow account

9. The securities certificates shall be extinguished and destroyed in presence of the Secretarial Auditor

10. SEBI exceeds the minimum earmarked amount for buyback via open market route

11. SEBI notifies disclosures, filing requirements and timelines for buy-back through the book-building process

The Securities and Exchange Board of India regulates the buyback on securities through SEBI (Buy-Back of Securities) Regulations, 2018, aiming to streamline the buyback of securities on recognized stock exchanges. These regulations provide guidelines on eligibility criteria, disclosure requirements, and other related matters for issuers, intermediaries and stock exchanges.

SEBI was in continuous discussions to roll out buyback through the odd lot method. Now, vide notification SEBI/LAD-NRO/GN/2023/120, Dated 07.02.2023, the SEBI has amended buyback regulations. As per the amended norms now Buyback can be carried out via tender offer or open market method only. The Key Highlights of the amendment are as follows:

1. SEBI introduces the definition of ‘frequently traded shares’

Presently, SEBI Buyback regulations don’t cover any definition of frequently traded shares. Pursuant to present amendment, SEBI introduces the definition of frequently traded shares. The ‘frequently traded shares‘ shall have the same meaning as assigned to them under the SEBI (SAST) Regulations, 2011.

As per SEBI (SAST) Regulations, 2011, the “frequently traded shares” means shares of a target company, in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is required to be made under these regulations, is at least ten per cent of the total number of shares of such class of the target company.

2. Buyback limits shall now be based upon standalone ‘or’ consolidated financial statements of the company

Presently, all the limits including maximum limits under regulation 4(i), is based upon both standalone and consolidated financial statements of the company. Now, limits under Buyback regulations will be based on company’s standalone or consolidated financial statements, whichever sets out a lower amount.

3. SEBI in the verge of rolling out buyback from open market through the stock exchange

Presently, the buyback from open market shall be less than 15% per cent of the paid up capital and free reserves of the company. Now, SEBI has prescribed the 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% of the paid up capital and 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 SEBI has also clarified that buy-back from the open market through the stock exchange shall not be allowed with effect from April 1, 2025.

Further, an amendment has also been notified in regulation 17(i), now the buy-back offer shall open not later than four working days from the record date and shall close:-

• within six months, if the buy-back offer is opened on or before March 31, 2023;
• within 66 working days, if the buy-back offer is opened on or after April 1, 2023 and till March 31, 2024; and
• within 22 working days, if the buy-back offer is opened on or after April 1, 2024 and till March 31, 2025

4. ‘Buyback via odd lots’ is no longer be  allowed for carrying out buyback

Earlier, a company was allowed to carry out buyback through the tender offer, from the open market through book-building process or stock exchange and from odd-lot holders. Now, SEBI notified amendment in Regulation 4(iv) of Buyback Regulations. The board has eliminated Buyback from odd-lot holders, from the allowed methods to carry out buyback.

5. Prior consent of lenders is required in case of a breach of any covenant before buyback offer

Earlier, the company was not authorized for any buy-back unless:

• The buy-back is authorized by the company’s articles;
• A special resolution has been passed at a general meeting.

Now, through the present amendment, the SEBI has also made it mandatory to obtain the prior consent of its lenders in case of a breach of any covenant with such lender. Now, all three conditions are required to be complied.

6. Board can now increase the buyback price and decrease the number of securities

The SEBI via the present amendment has now opened up the option for the company to increase the maximum buy-back price and decrease the number of securities proposed to be bought back. It has been further clarified that there shall be no change in the aggregate size of the buy-back of securities.

Also, now all the filings to the Board shall be made only in electronic mode after being digitally signed by the company secretary or the person authorized by the board of the company. Further, SEBI also directed to place copy of the public announcement on the respective websites of the stock exchange, merchant banker and the company.

7. Board reduces the due date to file letter offer, from 5 days to 2 days; various other timelines changed

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

Now, the board has omitted the word ‘draft’ in regulation 8(i). The company shall now within 2 working days of the public announcement shall file the with the Board, a  letter of   offer through a  merchant banker.

Also, a certificate, issued by the merchant banker, who is not an associate of the company, certifying that the buy-back offer is in compliance of buyback regulations and that the letter of offer contains the information required, shall be obtained and filed along with Letter of offer.

Further, the offer for buy-back shall now remain open for a period of 5 working days, rather than 10 working days. Also, the date of the opening of the offer shall now not be later than 4 working days from the record date.

The company shall now return the remaining shares or other specified securities to the securities holders within  5 working days of the closure of the offer.

8. SEBI notifies changes in constituents of the Escrow account

Earlier, the escrow account referred to in the buyback regulation was consist of,

1. cash deposited with a scheduled commercial bank, or
2. bank guarantee in favour of the merchant banker, or
3. deposit of acceptable securities with appropriate margin, with the merchant banker, or
4. a combination of (i), (ii) and (iii)

Now, cash including bank deposits deposited with any scheduled commercial bank to be replaced in point (i), bank guarantee shall be now in favor of any merchant banker by any ‘scheduled commercial bank’  and in point (iii), acceptable securities shall be replaced with frequently traded and freely transferable equity shares or other freely transferable securities. Also, government securities, or units of mutual funds invested in gilt funds and overnight schemes can also be used.

Pursuant to this present amendment, the escrow account referred to in the buyback regulation shall now consist of:

1. cash including bank deposits deposited with any scheduled commercial bank

2. bank guarantee in favour of the merchant banker by any ‘scheduled commercial bank’

3. deposit of frequently traded and freely transferable equity shares or other freely transferable securities, with the merchant banker, or

• • • Government securities
    • units of mutual funds invested in gilt funds and overnight schemes

4. a combination of above.

9. The securities certificates shall be extinguished and destroyed in presence of the Secretarial Auditor

Earlier, the company was required to extinguish and physically destroy the  securities certificates so bought back in the presence of a registrar to an issue or the Merchant Banker and the Statutory Auditor within 15 days of the date of acceptance of the shares or other specified securities.

Now, rather than statutory auditor, the Secretarial Auditor shall be present. Also, the due date has been reduced from 15 to 7 working days. The company shall also furnish a certificate to the Board for the same, duly certified and verified by the secretarial auditor, rather than the statutory auditor.

10. SEBI exceeds the minimum earmarked amount for buyback via open market route

Earlier, the company was required to ensure that at least 50 % of the amount earmarked for buy-back is utilized for buying-back shares or other specified securities.  Now, such a limit of 50 % has been enhanced to 75 %. Also, the company shall ensure that at a minimum of 40 % of the amount earmarked for the buy-back is utilized within the initial half of the specified duration.

11. SEBI notifies disclosures, filing requirements and timelines for buy-back through the book-building process

The SEBI in the present amendment has notified new regulations 22A, 22B, 22C, 22D and 22E for disclosures, filing requirements and timelines for buy-back through the book-building process. Some of the key highlights are:

• Company shall appoint a merchant banker and make a public announcement within 2 working days from the date of the Board’s approval or shareholders’ approval.
• The book building process shall commence within seven working days from the date of the public announcement.
• The public announcement shall contain the detailed methodology pertaining to intimation required to be made prior to the opening of the buy-back offer.
• The company shall disclose the maximum buy-back price, being the upper end of the price range, and the book value of the shares or other specified securities.
• The company shall publish the offer opening announcement on the date of commencement of the buy-back.
• The buy-back price shall depend upon the price discovered through the bids received from the shareholders within the price range.
• The payment of consideration shall be completed within a period of 5 working days from the date of closure of the buy-back offer.
• Retail investors will have the option to bid at the buy-back price.
• The buy-back offer shall be kept open for a minimum of two trading days.