Tighter rules add spark to India Inc buybacks

Success rate of buybacks improves to nearly 98% after Sebi enacts new rules

Between 2002 and 2013, companies acquired less than half the proposed share buyback amount. However, after market regulator Securities and Exchange Board of India (Sebi), tightened the buyback norms to avoid the misuse of the instrument, the success rate of buybacks has improved to nearly 98 per cent.

"Earlier, most companies announced buybacks just to shore up stock prices but never actually bought back shares. Since Sebi has tightened the regulations, the misuse has been curbed. Only serious players wanting to reward shareholders are now making announcements," said a Sebi official.

In August 2013, the market regulator made some key changes to buyback regulations. Among them were a minimum buyback clause, setting aside 50 per cent of the proposed buyback amount in an escrow and use of mandatory use of the 'tender route' if the proposed amount exceeded 25 per cent of the company's net worth.

Further, the new regulations also asked to wrap up the share repurchases within six months from the day the issue opened. Earlier there was no specific timeline. Since the tightening, only the companies which are serious about share repurchases are making announcements.

"These days only companies with genuine buyback intentions are making the announcements. That is why lion's share of buybacks in the last three years has come through tender route which is quicker and efficient. Earlier, companies with malafide intentions use to announce repurchases via open market route where the issue would be open for one year," said Prithvi Haldea, founder, Prime Database.

After the new buyback rules become effective, most companies started opting for the 'tender route' over the erstwhile favourite 'open market' route. The success rate for 'tender route' is almost 100 per cent, while that for open market route is less than 40 per cent, an analysis of buybacks for the last 15 years show.

For instance, in 2012 Reliance Industries (RIL) announced a Rs 10,440-crore share buyback through the open market route. The company ended up buying back shares worth Rs 3,900 crore. A part of the reason for the low conversion rate was that RIL shares had rallied beyond the maximum buyback price that was being offered.

Market participants also say the scenario around buybacks has also changed in the last few years. Ever since the government announced a tax on dividend distribution, companies are increasingly using buybacks as means to reward shareholders, particularly promoters. In contrast, companies earlier preferred open market buybacks as promoters did not necessarily want to tender their shares in the offer.

There are two ways in which companies can buyback shares from investors: open market route and tender offer route. In the open market route, the company appoints bankers who will purchase shares of the company from stock exchange platforms at the market price. In tender route, shareholders have to tender their shares and buyback would be done on a proportionate basis. Unlike the open market route, in tender offer route even promoters and promoter group can participate in the buyback.

In the Union Budget 2016-17, government decided to levy 10 per cent additional dividend tax (ADT) on investors who received dividends worth more than Rs 10 lakh. Since then, companies have been using buybacks as means to reward shareholders. In the first seven months of 2017, markets have witnessed buybacks to a tune of Rs 28,865 crore, data showed.

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Source: Prime Database