Tighter rules add spark to India Inc buybacks
The success rate of buybacks improves to nearly 98 per cent after Sebi enacts new rules
Companies have bought back shares worth nearly 98 per cent of what they had promised to purchase from shareholders only after the Securities and Exchange Board of India (Sebi) tightened the buyback norms.Between 2002 and 2013, companies had bought back less than half the proposed share buyback amount. Earlier most companies used to announce buybacks just to shore up stock prices but never bought back any shares. Since Sebi has tightened the regulations, the misuse has been curbed, according to a Sebi official.
Companies have bought back shares worth nearly 98 per cent of what they had promised to purchase from shareholders only after the Securities and Exchange Board of India (Sebi), the markets regulator, tightened the buyback norms.
Between 2002 and 2013, companies had bought back less than half the proposed share buyback amount.
“Earlier most companies used to announce buybacks just to shore up stock prices but never bought back any shares. Since Sebi has tightened the regulations, the misuse has been curbed. Only serious players wanting to reward shareholders make announcements,” said a Sebi official.
In August 2013, the markets regulator had made some key changes to buyback regulation. Among them were a minimum buyback clause, setting aside 50 per cent of the proposed buyback amount in an escrow, and using the mandatory use of the ‘tender route’ if the proposed amount exceeded 25 per cent of the company’s net worth.
There are two ways in which companies can buy back shares from investors: The open market route and the tender offer route.
In the open market route, the company appoints bankers who purchase shares of the company from the stock exchanges at the market price.
In the tender route, shareholders have to tender their shares and the buyback would be done on a proportionate basis.
Unlike the open market route, in the tender offer route even promoters and promoter groups can participate in the buyback.
Further, the new regulations also mandated wrapping up the share repurchase within six months of the day of the opening of the issue. Earlier there was no specific time-line.
“Earlier, companies with mala fide intention used to announce repurchases via the open market route where the issue would be open for one year,” said Prithvi Haldea, founder, Prime Database.
After the new buyback rules become effective, most companies started opting for the ‘tender route’ over the erstwhile ‘open market’ route. The success rate of the ‘tender route’ is almost 100 per cent, while that for the open market route is less than 40 per cent, an analysis of buybacks for the last 15 years shows.
For instance, in 2012 Reliance Industries Ltd (RIL) announced a ~10,440-crore share buyback through the open market route. The company ended up buying back shares worth ~3,900 crore. Part of the reason for the low rate was that RIL shares had rallied beyond the maximum buyback price that was being offered.
Market participants also say the buyback situation has changed in the past few years. Ever since the government announced a tax on dividend distribution, companies are increasingly using buybacks as means to reward shareholders, particularly promoters. In contrast, companies earlier preferred open market buybacks because promoters didn’t always want to tender their shares in the offer.
In the Union Budget 2016-17, the government decided to levy a 10 per cent additional dividend tax (ADT) on investors who received dividends worth more than ~10 lakh.
Since then, companies have been using buybacks as means to reward shareholders. In the first seven months of 2017, markets had witnessed buybacks of ~28,865 crore, the data showed.