New buyback norms welcomed

Experts say the tighter share buyback norms will help ensure only companies with clean intentions come to the market

The tighter share buyback norms would help ensure only companies with clean intentions come to the market, said experts.

The Securities and Exchange Board of India (Sebi) has increased the compulsory buyback amount from 25 per cent of the offer size to 50 per cent and reduced the buyback time frame from 12 months to six months. It has also asked companies to keep 25 per cent of the buyback offer money in an escrow account. And, 2.5 per cent of this offer money will be forfeited for failing to buy at least 50 per cent of what was announced.

The overhaul was done after it came to Sebi's notice that some companies made buyback announcements but didn't buy a single share from the market. The announcement was done only to boost share prices.

“Sebi is ensuring greater commitment by companies which say they want to buy back shares. Now, companies will have to take a conscious call on whether they actually want to utilise their surplus cash for buybacks,” said Sudhir Bassi, executive director, Khaitan & Co.  

“The decision to revise the buyback guidelines comes from the  pressing need to regulate the pricing, quantity and periodicity aspects of past offers. Mandatory purchase of at least 50 per cent of the offer size, coupled with the transfer of 25 per cent of the amount to an escrow account and the tight timeline of three months for completion of the offer, will optimise the broad purpose of Sebi, that the platform is not misused by companies to stabilise the share price,” said Hemal Uchat, executive director, PwC India.

Experts said as there will be a cost associated with buyback and more scrutiny, companies wouldhave to think twice before making an announcement.