In 1998-99, the laws related to provisions for companies to buy-back their own shares were laid down in both the Companies Act and SEBI guidelines. The Companies Act, 1956 laid down “buy- back” of securities under section 77 A (Section 68 of Companies Act, 2013) with an intention to purchase their own shares or other specific securities. There is additional compliance required when a company buy- back the securities or other specified securities which are listed on any recognized stock exchanges.
Conditions of Buy-Back:
- Approval of Board of Directors (up to 10% of the total paid-up equity capital and free reserves of the company) or
- Approval of Shareholders (up to 25% of the aggregate of paid-up capital and free reserves of the company).
- Only fully paid-up shares can be brought back in a financial year.
- Completion of Buy-Back within a period of one year from the date of passing of Special Resolution or Board Resolution.
The SEBI (Buy-back of Securities) Regulations, 1998 were formulated to ensure greater transparency in the buy-back procedure for listed shares and specified securities. Latest amendment has come in the form of SEBI (Buy-back of Securities) (Amendment) Regulations, 2023 notified as on February 7, 2023 effective for all buy-back offers where the Board of Directors of the company approve resolution with respect to Buy-back on or after 30th day of the date of notification of this amendment in the official gazette March 09, 20231.
Key highlights of Amendment, 2023:
It is pertinent to highlight the general changes that have been induced:
||Tender Offer Method
|1. Draft letter of offer, was filed by Merchant Banker.
||1. Merchant banker2, has to now certify Letter of Offer is in compliance with the Regulations.
|2. Company shall file supporting documents with Letter of Offer within five working days of the public announcement in electronic mode.
||2. The public announcement shall disclose that a letter of offer shall be dispatched through electronic mode within 2 working days from the record date.
|3. The previous Buy-back regulations does not facilitate the possibility of any subsequent revision in the buy-back price.
||3. Listed entities may, increase the maximum buy-back price and decrease the number of securities proposed to be bought back, until one working day prior to the record date, so long as there is no change in the aggregate size of buy-back.
|4. The required review of the draft letter of offer by SEBI, the comments were required to be incorporated by the merchant bankers in the final letter of offer.
||4. Draft letter of offer3 requirement with SEBI comments is done away with. Company can directly proceed with Letter of offer.
|5. Filling of Letter of Offer and related auxiliaries within five working days (of the public announcement)
||5. Filling of Letter of Offer and related auxiliaries within two working days (from record date)
|6. Date of opening of offer shall not be latter than five working days (from the dispatch date from the letter of offer)
||6. Date of opening of offer shall not be latter than four working days (from the record date)
|7. Offer will be open for a period of ten working days
||7. Offer will be open for a period of five working days
||Open Market Method through stock exchange
|1. Open market buy-back through stock exchanges, has been criticized due to several limitations.
||1. Open market buy-backs through stock exchanges will be completely phased out from April 1, 2025.
|2. The buy-back offer shall open not later than seven working days from the date of public announcement and shall close within six months from the date of opening of the offer.
||2. SEBI has put up a plan for systematic phasing out of the open market buy-backs through stock exchanges, which shall be achieved by limiting the quantum of buy back:
- 15% of the paid up capital and free reserves of the company till March 31, 2023
- 10% of the paid up capital and free reserves of the company till March 31, 2024 and
- 5% of the paid up capital and free reserves of the company till March 31, 2025.
||3. Buyback through the stock exchange route would now be restricted only to companies whose shares are frequently traded4.
||Open Market Method through Book Building
|1. A company may buy-back its shares or other specified securities through the book-building process
||1. SEBI notified a revised mechanism for open market buybacks through book building process.
|2. The company shall appoint a merchant banker and make a public announcement at least seven days prior to the commencement of buy-back.
||2. Company shall appoint a merchant banker and make a public announcement within 2 (two) working days from the date of approval by the board of directors or shareholders of such company.
|3. No provision for commencement of process. The offer for buy-back shall remain open to the securities holders for a period not less than fifteen days and not exceeding thirty days.
||3. The book building process shall commence within 7 (seven) working days from the date of the public announcement.
|4. Timeline for payment of consideration was not specified.
||4. The payment of consideration shall be made within a period of five working days from the date of closure of the buy-back.
|5. Public Announcement did not disclose method of acceptance of bids.
||5. Methodology for acceptance of bids to be disclosed in Public Announcement – The buy-back offer shall be kept open for two trading days.
|6. Both Retail investors and Promoters can participate.
||6. Promoters along with their associates shall not participate in the buy-back through book building process.
|7. No such provision for intimations.
||7. Additional Obligations to be adopted prior to the opening of an offer set out for following intimations (Schedule VI):
- To the stock exchanges before 5 pm on the day immediately preceding the date of commencement of the buy-back and
- To the shareholders, 2 (two) working days preceding the date of the Notice through email and SMS.
|1. As per previous regulation, the buy-back consideration is required to be deposited in the escrow account either in the form of cash or through permitted forms other than cash, on or before the opening of the offer.
||1. The company shall be required to open an escrow account, within two working days of the public announcement.
|2. Prior to the Amendment Regulations, the same read as 1% of the total consideration payable.
||2. Escrow account that is held in a form other than cash, the company is also required to deposit with a scheduled commercial bank, in cash, a sum of not less than 2.5% of the total amount earmarked for buyback, as security for the fulfilment of its obligations under the regulations.
|3. The escrow account shall, subject to the margins of SEBI, consist of
- cash including bank deposits, deposited with any scheduled commercial bank
- bank guarantee issued in favour of the merchant banker by any scheduled commercial bank
- government securities
- units of mutual funds invested in gilt funds and overnight schemes or
- a combination of the above.
|3. The escrow account can be additionally consisting of deposit of frequently traded and freely transferable equity shares or other freely transferable securities.
Following other changes are being set out through the Notification:
- ‘Buyback via odd lots’ is no longer be allowed for carrying out buyback
- Buyback limits shall now be based upon standalone ‘or’ consolidated financial statements of the company and not both.
- The securities certificates shall be extinguished and destroyed in presence of the Secretarial Auditor5
- A prior lender consent shall be obtained in case of a breach of any covenant with such lender and a disclosure of the consent shall form part of the letter of offer.
- Filings of Special or Board Resolution pertaining to buy-backs with SEBI shall be in electronic mode after being digitally signed by the Company Secretary or any person authorized by the board of directors. So, role of Company Secretaries has attached responsibilities now.
- SEBI has accepted the terminology of ‘working days’ in buyback regulations as against ‘days’ used earlier. Accordingly, the listed entities would have more time to undertake certain compliances or disclosures under the Buy-back regulations.
- Secretarial Auditor (defined under Institute of Company Secretaries of India) is referred to in the roles of Statutory Auditor6
In order to safeguard the interest of the investors, SEBI has curtailed the timelines for closure and payment to securities holder and streamlined the process of buyback thus expediting the completion of compliances by the listed companies. The amendment also highlighted the usage of electronic mode for filing and reporting under the Buy-back Regulations.
The timelines for the dispatch of the offer letter, buy-back period offer, creation of escrow account, closure of the buy-back offer have been made amended and made more stringent. The move towards buy-back under the tender route entirely with a stricter timeline and an ability to revise the price upwards until a later stage makes the buy-back scheme much more robust and investor friendly. The Notification can be considered as an effort by SEBI to increase its vigilance and empower itself for maximum investor protection and benefits.
- Operational Guidance in respect of Amendment dated Feb 7th 2023, clarified regarding applicability of amended provisions.
- “merchant banker” means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management;
- “Draft letter of offer” is termed as a document that is filed with SEBI through the Manager to the Buyback, containing disclosures in relation to the Buyback as specified in Schedule III of the SEBI Buyback Regulations
- frequently traded shares means shares of a target company, in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is required to be made under these regulations, is at least ten per cent of the total number of shares of such class of the target company.
- Secretarial Auditor means a Company Secretary in Practice or a firm of Company Secretary(ies) in Practice appointed in pursuance of the Act to conduct the secretarial audit of the company.
- “Statutory Auditor” means an auditor appointment by a company under section 139 of the Companies Act.