Securities and Exchange Board of India (SEBI) has proposed significant changes to the existing framework for buyback of shares by companies from the open market that require the process to be completed in three months and minimum repurchase to be 50 per cent of the target.
At present, the period of share buyback is 12 months.
“... it is proposed that companies complete the buy back in three months. To ensure that only serious companies launch the buyback programme, it is further proposed that these companies be mandated to put 25 per cent of the maximum amount proposed for buy back in an escrow account,” SEBI said in a discussion paper.
The regulator has suggested that the companies, which are unable to buyback all the targeted shares (or proposed amount), should be barred from coming up with another repurchase offer for one year.
Another suggestion is that companies should disclose the number of shares purchased and the amount utilised to the exchanges on a daily basis.
Citing buyback offer trends, SEBI said despite the intention disclosed by companies to their shareholders at the time of making buyback offer, the buyback offer was not used as an opportunity for enhancing the book value of the shares of the company.
“It has been observed that in 75 buyback cases through open market purchases, which closed during the last three financial years (from April 1, 2007 to March 31, 2010), an average of 49.91 per cent of the maximum offer size (as disclosed in public announcement to shareholders) was utilised by the companies for the buy back,” the paper said. Further, SEBI said in many instances, companies took shareholders/board approval for buybacks but did not take a “single step to buy the shares”.
Generally, buybacks are intended to return surplus cash to the shareholders, to provide support for share price during periods of temporary weakness and to increase the underlying share value.