[Opinion] Ease of Corporate Slimming: SEBI proposes substantial relaxation of buy-back norms

[2022] 145 taxmann.com 90 (Article)

Rolls out consultation paper promoting buy-back through tender offer

Distribution of profits to shareholders may take up various forms, as also discussed in Distribution of accumulated profits to shareholders. One such manner of distribution is “buying back” the existing securities of the company from the shareholders. In addition to the provisions of section 68 of the Companies Act, 2013 (“the Act”), the provisions of SEBI (Buyback of Securities) Regulations, 2018 (“Buy-back Regulations”) are also applicable in case of buy-back of shares or other specified securities of a listed company. The Buy-back Regulations repealed the erstwhile Buyback Regulations, 1998 and our article on the same can be read at SEBI amends Buyback Regulations: -Aligning and re-framing with other laws. SEBI has brought a consultation paper on review of existing Buy-back Regulations (“Consultation Paper”) on 16th November, 2022. The Consultation Paper, based on a report of a sub-group headed by Mr Keki Mistry, makes some very significant recommendations for reform of the existing buy-back regime, including some statutory amendments too. If implemented, these proposals will cause the presently-permitted open market acquisitions to face a sunset, and permit an annual limit of 40% of net worth for buy-back, as opposed to the present limit of 25%. As a result, a company, having sufficient surpluses or share premium, may scale it down to 40% in just a year’s time, and that too, by a bi-ennial buy-back exercise. It is open for comments till 1st December, 2022.

The Consultation Paper proposes various amendments to the existing Buy-back Regulations, for the purpose of removing the inefficiency of certain modes of buy-back, streamlining the timelines, scaling up the extent of permitted limits on buy-back, assisting efficient price-discovery mechanism and defying the prospects of manipulative market practices. Certain proposals may also require consent of other regulatory authorities such as MCA, MoF etc. and amendments to other related laws. We attempt to put up an analysis of the proposals contained in the Consultation Paper with respect to the buy-back of securities by listed companies.

Modes of buy-back

Reg 4(iv) of the Buy-back Regulations specifies various methods for buyback of securities being –

a. Tender offer to existing shareholders on a proportionate basis;
b. Open market mechanism through

i. Book building process
ii. Stock exchange

c. Purchase of shares from odd-lot holders

The market practice, as can be understood from the data available on the website of SEBI, tender offer is by far the most preferred method for buy-back of securities. The same derives its preference from the fact that the same provides a chance of equal participation by all shareholders, since the repurchase takes place on a proportionate basis from all those shareholders who tender their shares for buyback.

On the other hand, open market buy-back, especially through stock exchanges, has been criticized due to several limitations. The Consultation Paper also discusses the existing limitations in the method and proposes gradual removal of the process, by way of a proposed “glide path”.

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