The norms unveiled by Securities and Exchange Board of India (Sebi) for share buyback through the tender offer route will improve retail investors' chances of participating in the markets. The market regulator has reserved 15 per cent for small shareholders.
What is a tender offer route?
It is one of the two methods used by companies to buy back. Here, the company makes an offer to buy a certain number of shares at a specific price, directly from the shareholders. This ensures all shareholders are treated equally, irrespective of whether they hold a majority or a minority stake.
However, not many opt for this route. Piramal Healthcare was the only one in the last two years to take this route. The modification in the norms will not lead to companies opting for this route, as it is more theoretical, say merchant bankers.
The other route, and the more popular one, is where the company purchases its own shares from the open market.
Categories in tender route:
Till now, there was no reservation in buyback offers under the Sebi guidelines. Now, however, there will be two categories: small shareholders and a general category for others — institutions and high net worth individuals.
Also, anyone with up to Rs 2 lakh worth of shareholding will fall under the category of small investors. Till now, this limit stood at Rs 1 lakh.
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Does this benefit the small investor?
It will benefit small investors only when the buyback is oversubscribed, as in such cases the shares will be bought back on a proportionate basis. The over-subscription will be considered independently for each category.
Assume a company is conducting a buyback of 10 lakh shares. The total number of shares offered is 60 lakh: three lakh by retail investors and 57 lakh by the general category. According to the earlier norms, the small investor had a one-sixth or 14.92 per cent chance of participating in the buyback. But as per the new guidelines, since the retail portion is oversubscribed two times, the retail investor stands a 50 per cent chance of selling his share - a big improvement.
Taxation and costs:
Investors selling shares via the tender route will have to pay tax according to their applicable brackets. There is no Securities Transaction Tax. Transactions through this route will be treated as business income. However, there will be savings in terms of nil brokerage fee.