Thursday, January 3, 2013

Proposed modifications to buyback provisions

SEBI has just placed a discussion paper on its website entitled “Proposed modifications to the existing framework for buy back through open market purchase” for public comments. Comments on the discussion paper have been solicited on or before January 31, 2013.

Upon a review of the current regulations and studying the market dynamics, the key recommendations of the discussion paper are set out below:
  1. The merchant bankers should be advised to ensure that a minimum of 50% of the maximum buy-back proposed/disclosed to be bought back.
  2. It is proposed that companies complete the buy back in 3 months. To ensure that only serious companies launch the buyback program, it is further proposed that these companies be mandated to put 25% of the maximum amount proposed for buyback in an escrow account.
  3. It is proposed that listed companies coming out with buyback programs may not be allowed to raise further capital for a period of two years.
  4. In order to ensure that the companies do not launch buyback programs for stabilizing the share price, it is proposed that companies who are not able to buy back 100% of the proposed amount (or the proposed maximum number of shares) may not be allowed to come with another buyback for a period of at least one year irrespective of the mode of approval for buy back.
  5. It is also proposed that buy-back of 15% or more of (paid up capital + free reserves) must be only by way of a tender offer method.
  6. It is proposed that the issuance of shares pursuant to obligations arising out of Employee Stock Option schemes may be allowed during the buy-back period subject to the following: (a) the shares are not allotted to directors and key managerial personnel of the company; (b) there is no acceleration in the vesting period.
  7. It is proposed that the companies shall extinguish/ destroy shares bought back during the month, on or before fifteenth day of the succeeding month subject to the companies destroying the bought back shares in the last month within seven days of the completion of the offer.
  8. The current regulations prohibit the promoters of the company in dealing in the securities of the company during the period when buy back is open. It is proposed to extend this restriction to dealing in the securities of the company off–market as well.