In With the New

The age-old share buyback norms could see a major overhaul soon

Sebi favours phasing out the openmarket share buyback route as it is prone to misuse

X SHARE BUYBACKS ARE set to be disrupted. While rules governing buyback offers were framed in 1998, the Securities and Exchange Board of India (Sebi) has regularly amended and updated them. Now, the markets regulator has proposed a major overhaul. And, going by the discussion paper issued recently, it is all set to change the way buybacks are executed today.

Buyback refers to a mechanism wherein a company buys back its own shares. It can be done in two ways—buy shares from the open market or through the tender route—wherein shareholders of the company tender their shares.

Sebi has hinted that it is in favour of phasing out the open-market purchase route as it is prone to misuse. The paper also proposes changes to the tender offer route to streamline the process and reduce the timelines. Another proposal is to do away with mandatory regulatory approval of the draft letter of offer and instead get merchant bankers to certify that the offer is in compliance with the rules.

Also, Sebi favours allowing the open offer price to be revised by the board of directors of the company.

Experts believe that while Sebi has proposed many changes to the buyback regulations, there are three to four key takeaways that would impact the buyback segment. “Some of the key elements of the Sebi discussion paper are the fact that it plans to phase out buybacks done through the open market while enhancing the limit to 45 per cent from the current 25 per cent for the tender offer route and do away completely with the Sebi review process, which will help in reducing the overall timelines of a buyback offer,” says Manshoor Nazki, Partner at law firm Induslaw. A big change that has been proposed is shifting the tax burden from the company to the shareholders, he adds.

In Sebi’s own words, the current mechanism of tax favours shareholders who tender their shares and adversely impacts those who choose to stay invested in the company. “All the continuing shareholders have to share the burden of tax payable by the listed company on the buyback proceeds of the shares tendered by exiting/tendering shareholders,” states the Sebi paper, adding that it will propose to the government to amend the tax laws to shift the tax liability from the company to the shareholders.

While all these are still recommendations and public comments have been invited before the final framework is structured, the proposals do attempt to bring buyback norms in sync with the current times.