Buyback norms tightened, foreign investment eased

The Securities and Exchange Board of India (Sebi) on Tuesday tightened share buyback norms to make the process more credible, but simplified foreign investment rules in a bid to bring back the money that has left the equity markets in the past few weeks.

Companies will now have to use at least half the funds identified for buying back shares – up from 25% required currently – and complete the process within six months, said Sebi.

Buyback involves a company repurchasing its own outstanding shares in a bid to reduce the total shares in the market. This usually boosts the share price as the earnings per share go up.

But it was noticed that firms used the tool to artificially raise the stock price and almost never honoured the offer.

The new requirement is expected to keep bogus buyback offers at bay. The rules, which are based on the recommendations of a panel headed by former cabinet secretary K M Chandrasekhar, unveiled earlier this month, need to be approved by the government for implementation.

“The regulator’s decision to revise the buyback guidelines comes from the hard pressed need to regulate the pricing, quantity and the periodicity aspects of the buyback offers in the past,” said Hemal Uchat, executive director at PwC India.

The regulator also said that the company will have to keep 25% of the identified funds in an escrow account and cannot make another buyback offer within one year of the date of closure of the prior offer.

But some market experts see the move as micromanagement by a regulator.

Going by them, the timing of buyback depends on share movement and should not be governed by these fixed timelines.

As for encouraging foreign investment, Sebi approved the creation of single category of overseas investors called the Foreign Portfolio Investor (FPI), which would include foreign institutional investors as well as qualified foreign investors.
FPIs’ stake in the company should not be more than 10%, according to the new rules. Purchases above that percentage will be regulated under the foreign direct investment rules.

Sebi also simplified the registration procedure and know your customer norms by classifying FPIs on their risk profile. Category 1 will have the least restrictions, while Category 3 will have the most.

“It is a good move forward. It reduces the painful process even though it cannot change the business climate. At least some of the roadblocks have been cleared. We need foreign capital right now,” said Sandeep Parekh of Finsec Law Advisors.

FIIs have pulled out Rs 10,551 crore only in the last 11 trading sessions, leaving the equity markets in tatters, on apprehension that the US Fed will stop its quantitative easing programme.

Sebi also allowed start-ups and small and medium enterprises to get listed on a separate trading platform of institutional investors, known as the Institutional Trading platform, without having to do an IPO. This is expected to help these companies get access to funding and give existing angel investors and private equity an exit option.