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In the last two and a half years about a third of the 37 companies that offered to buy back their shares could not meet a 50% of their offer size, a criterion that has been now set by the market regulator the Securities and Exchange Board of India (SEBI) for the forthcoming offers.
SEBI yesterday tightened the share buyback rules further by increasing the cool-off period for raising further equity capital from six months to 12 months post the completion of the share buy back offer.
"The number of buy back offers are likely to go down as the companies will now have to have 18 months view for their cash requirements in volatile market conditions," says Sudhir Bassi, executive director at corporate law firm Khaitan & Co. The buy-back offers are to be completed within six months of the announcement.
Companies ideally buy back their shares when they have cash on their books which they do not expect to deploy in the business for better returns. Since the buyback of shares brings down the number of outstanding shares, it helps to boost earnings per share (EPS) of a company and hence boosts its share price.
SEBI is concerned when companies use the buyback offer to boost their stock and not to reward the shareholder. A company could earlier make a buyback offer to boost share price and if required raise equity capital after six months using various instruments such as qualified institutional placement (QIP), preferential allotment.
But now the companies will have to pay a 2.5% of the buyback amount as penalty in case they are not able to meet a 50% of their offer size. As per data provided by financial research company Capitaline, 13 out of the 37 companies that made the offer since January 2011 did not meet half of their offer size. This includes Reliance Industries and Reliance Infrastructure which respectively closed their offers in 2013 and 2012.
The penalty in case of the RIL which closed its buyback offer after meeting 38.5% of the size would have been about Rs 261 crore and for Reliance Infrastructure this would have been Rs 25 crore if they had made the offer under SEBI’s current guidelines. These companies of course do not have any such liability as SEBI’s guideline is for forthcoming offers only.
“Companies will have to now also analyze the liquidity of their shares in the stock markets carefully before deciding the size of the buyback offer,” says Hemal Uchat, executive director at consulting firm PricewaterhouseCoopers.
