Buybacks made tougher, FII investment route eased

Sebi overhauls norms to discourage frivolous offers to shareholders

The Securities and Exchange Board of India (Sebi), at a board meeting on Tuesday, tightened share buyback rules to discourage companies from announcing frivolous offers. Also, to simplify the process for foreign investors to bring money into the country, the market regulator approved some key changes to foreign investment routes.

Sebi has made it mandatory for companies to buy back at least 50 per cent of the proposed offer size - a penalty of 2.5 per cent will be charged on companies failing to do so. Besides, companies will have to keep 25 per cent of the buyback amount in a separate escrow account and complete their share buybacks within six months, compared with one year earlier. It has been decided that there will be a one-year cooling-off period between two buybacks and companies will not be allowed to carry out any fundraising during this period.
 

Experts said Sebi's steps were investor-friendly and would discourage companies using buybacks as a measure to support their share prices. "Companies can no longer afford to announce frivolous buyback offers, as they stand to lose 2.5 per cent of the buyback amount. The reduced timeframe will reduce market manipulations," said Shriram Subramanian, founder and MD, InGovern Research.

Amit Tandon, founder and MD of IIAS, said: "Some companies, without any serious intention, made buyback announcements only to boost their share prices. Now, as there will be a cost associated, they will be discouraged from making unserious announcements."

Sebi also accepted the key recommendations of the Chandrasekhar panel on foreign investment route rationalisation. These included fewer routes for FIIs and simpler registration and KYC processes. The move has come at a time when foreign investors are pulling out of both debt and equity markets, adding to the current account deficit problem.

TIGHTER GRIP Some of Sebi’s key decisions today

On buyback

• Mandatory to buy back 50% of offer size; penalty of 2.5% on failing to do so
• Buyback period reduced to six months from one year
• Tender route compulsory if buyback size is over 15% of paid-up capital

On SME listing

• Start-ups and SMEs allowed to list without IPO or fundraising
• Separate ‘institutional trading platform’ for such companies only for informed investors
• Minimum trading/ investment amount to be Rs 10 lakh

On FII routes

• FIIs, sub-accounts & QFIs merged into a new class called the foreign portfolio investors
• Direct registration of FIIs and sub-accounts with Sebi to be done away with
• Risk-based KYC, depending on investor profile

Other announcements

• Single SRO for MF product distributors
• Green signal for AMCs to become prop trading members in debt segment
• Limited-purpose membership for MF distributors
• MFs not allowed to appoint a custodian belonging to the same group
• More power to clearing corporations
• New sub-category of ‘angel funds’ under AIFs

Experts said the move to simplify FII routes was a step in the right direction and might help improve foreign investor sentiment.

Sebi also announced a new trading platform to enable listing and trading in start-ups and small & medium enterprises (SMEs) without having to go for a public offer or capital raising. This platform - the institutional trading platform (ITP) - will be made available only to informed investors and the investment ticket size would be Rs 10 lakh. "Listing on ITP by start-ups and SMEs is expected to offer their existing investors better chances to find alternative buyers," Sebi said in a release.