Minority shareholders’ interest to be kept in mind.
While the government is exploring the possibilities of allowing public sector undertakings (PSUs) to buy back their shares, which is also expected to help the government meet the disinvestment target of Rs 40,000 crore for the current financial year, market regulator Securities and Exchange Board of India (Sebi) is unlikely to give a blanket approval for the move.
A case-by-case nod by Sebi according to the buyback norms, keeping in mind the interest of minority shareholders, was likely if the government decided to go ahead with the proposal, two officials associated with the process told Business Standard independently.
The government is analysing the cash available with the various public undertakings to understand their requirement before taking a decision.
Under the current regulations, market regulator Sebi allows companies which want to reduce share capital, to buy back their equity from shareholders. It prohibits participation by promoters in case of buyback from stock exchanges. They can participate in a tender offer as well as a Reverse Book build offer, provided this is clearly mentioned in the offer documents.
"Public sector companies should buy back their shares through open tender, which will help complete the process faster. Going by the current market conditions, it is likely that only the government will tender shares to PSUs under the buyback programme and this will help the government raise money and meet disinvestment target," said Dharmesh Mehta, MD, Institutional Equities, ENAM.
A majority of other shareholders would prefer to wait for further capital appreciation, it is believed. A tender offer route is only viable if the government, promoter of the PSUs, has to participate.
Amid slowdown pressure on tax revenue collection and a ballooning oil subsidy bill, the government is looking for a measure to shore up revenues from disinvestment and avoid an impending major shortfall in the target of Rs 40,000 crore due to the sluggish market situation.
The revenue garnered from PSU stake sale this year till date has been Rs 1,144 crore. In the absence of additional money from this mode, it would be difficult for the government to avoid slippage on the fiscal deficit target of 4.6 per cent of gross domestic product.
Disinvestment was facing a roadblock due to the current depressed market condition.
Many PSUs have not performed well in the recent past and buyback is expected to support share prices of companies from falling further. According to Sebi norms, companies can go for buyback of shares from the existing shareholders and if shares offered are more than desired by the company, buyback can be on a proportionate basis.
Buyback reduces capital and net demand for shares increases which results in capital appreciation for all existing share holders. While the government may be able to sell its shares by offering that under buy back, its holding will fall and holding of other investors will go up.
This strengthens the position of the minority share holders as their entire holding goes up. Companies with surplus cash can do this provided they don’t have plans to issue similar type of security till the next 24 months of buyback, except as bonus shares or sweat equity shares or discharge of subsiding obligations like on conversion or stock option.
The buy back has to be out of free reserves/securities premium account or out of proceeds of issue of shares or other specified securities other than the type of the same kind of securities.
However, Abhay Bhalerao, director, Equrus Capital said, “While there is nothing wrong in making an attempt to reduce the government stake by asking cash-rich PSUs to buy back their shares, it would have been better the the government used the opportunity and sold its stake to strategic investors or private equity players. That would have pushed the privatisation programme in a decisive way and send positive signals to foreign investors about reforms.”
A company can buy back its shares without passing shareholders’ resolution if it is buying back 10 per cent of its paid up equity capital and reserves. However, if a company intends to buyback its shares to the extent of 25 per cent of its paid up capital and reserves, then, the same has to be approved by shareholders resolution.
