Mumbai, Jan. 2: The market watchdog has proposed to tighten share buyback rules to stop a pernicious practice adopted by some companies that have apparently misused the facility to prop up faltering stock prices.
As a first step, the Securities and Exchange Board of India (Sebi) said it wanted to make it mandatory for companies to purchase a minimum of 50 per cent of the shares that they proposed to buy back.
They will also have to deposit 25 per cent of the proposed share buyback sum in an escrow account.
It also said that listed entities coming out with a share buyback plan should not be allowed to raise further capital for a period of two years. This proposal was made because it had been noticed that companies usually launch buyback programmes when they have idle cash resources and no attractive investment opportunities.
Sebi also said a company that failed to buy back 100 per cent of the proposed number of shares would not be allowed to come out with another buyback for a period of at least one year irrespective of the mode of approval for the buyback.
The market regulator outlined these measures in a discussion paper it floated today.
According to Sebi, there have been cases where companies have taken board and shareholders' approvals but did not take a single step to buy back the shares.
Several companies have been erratic and whimsical in placing buy orders of the shares and "that too at price away from the market price".
In a share buyback, a company acquires its shares from the open market and then extinguishes them. This results in reduction in the outstanding number of equity shares, thereby leading to an increase in the earnings per share (EPS).
A buyback is usually resorted to support share price during periods of temporary weakness and increase its underlying value. Citing buyback offer trends, the market regulator said despite the intention disclosed by companies to their shareholders at the time of making a buyback offer, it is not used as an opportunity to enhance the book value of the shares of the company.
In an effort to ensure that only serious companies launch share buybacks, Sebi said the programme should be completed within three months from the launch date.
At present, companies can keep the buyback period open for a period of 12 months.
The regulator also proposed to tighten disclosure requirements on share buybacks. The company will have to disclose the number of shares purchased and the amount utilised to the exchanges on a daily basis.
The company will also have to submit a monthly report to the exchanges stating the total number of shares bought back till the end of the previous reporting period and the amount utilised, the total number of shares bought back during the current reporting period and amount utilised, the number of shares yet to be bought back and the amount yet to be utilised, and the number of shares extinguished and destroyed.
This information will also have to be appended to the quarterly and annual results.