Cracking the Whip

The stock market regulator, Securities and Exchange Board of India (SEBI), has mooted an overhaul of share buy-back norms to safeguard the interests of small shareholders and check manipulation of share prices by companies. Analysts, though, are divided on the need for reworking the guidelines.

SEBI proposes to make it mandatory for companies to acquire at least 50 per cent of the shares they plan to buy back –under the current guidelines, companies are expected to purchase 25 per cent, though it is not mandatory. The buy-back period will be restricted to three months from 12 months earlier, and companies have to keep 25 per cent of the buy-back amount in a separate escrow account. And significantly, if a company opts for a buy-back, it cannot raise capital from the equity markets for the next two years.

SEBI has formulated its draft proposals after observing that several companies did not even buy a single share even though the buy-back offer remained open for a year. It has also noted that the existing regulations are silent on price, quantity and periodicity. Also, shares were often bought at far lower prices than the maximum buy-back price announced.

SEBI’s new proposals are a step in the right direction and will ensure that only serious companies go for a buy-back, says Ajay Parmar, Co-head, Investment Banking, Emkay Financial. “As a company you are expected to know what your plans are for the next two years, and you cannot blame the regulator for restricting companies from accessing the capital market (after a buyback),” says Parmar. There are still many ways for a promoter to raise money.“Debentures and warrants are still open for promoters,” he adds.

Clearly, SEBI is worried that in India buyback of shares is usually a means to support share price during periods of temporary weakness rather than returning surplus cash to shareholders.

Still some analysts feel that the regulator should not rework the buy-back norms. “A buy-back is a psychological tool in the hands of promoters to support stock prices and they should be allowed to use it at their discretion,” says Sandeep Parekh, founder of Finsec Law Advisors. He also believes there should be no stipulation on how much companies should mop up in a buy-back.

Regardless of what SEBI finally decides, most analysts agree that the Indian stock market has matured in recent years and buy-backs often do not work as a tool to lift share prices – the recent buy-back programmes of DLF and Reliance Energy being prominent examples.

The regulator has invited responses to its proposals before January 31.