The Securities and Exchange Board of India (SEBI) has notified Securities and Exchange Board of India (Buy Back of Securities) Regulations, 2018 (amended Regulations) on 11-9-2018. This has effectively repealed the earlier buy-back regulations (Buy Back of Securities) Regulations, 1998. The new Buy-back Regulations were brought into existence in order to simplify the language, remove inconsistencies and harmonise references with the Companies Act, 2013. We shall discuss and analyse the new changes brought about by the amended Regulations in the current article.
Key Features of the Amended Regulations
(i) Buyback Period
The definition of buyback period has been introduced in the amended Regulations.
Buyback period is defined as, “the period between the date of board of directors resolution or date of declaration of results of the postal ballot for special resolution, as the case may be, to authorise buyback of shares of the company and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made”.
(ii) Updated references to Companies Act, 2013
(a) Maximum Limit of Buyback Securities
Maximum limit of securities that can be bought back is capped at twenty-five per cent as per Section 68(2)(c) of the Companies Act, 2013.
(b) Ratio of the Aggregate Secured and Unsecured Debts
The ratio of the aggregate of secured and unsecured debts owed by the company after buyback shall not be more than twice the paid-up capital and free reserves.
(c) Fully Paid-up Securities
All securities proposed to be bought back are required to be fully paid up.
(d) Reduction of Share Capital
It is mandatorily required that a buyback leads to consequent reduction of its share capital.
(e) Mode of Buyback
The amended Regulations while updating references from Section 68(1) of the Companies Act, 2013 require that no
buyback shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(iii) Participation of a Public Shareholder
The amended Regulations allow an eligible shareholder to participate in the buyback offer and tender shares even if he has not received the tender offer/form.
(iv) Interest-bearing Escrow Account
The monetary part of the escrow account may be maintained in an interest-bearing account, given that the merchant banker ensures that the funds are available at the time of making payment to shareholders.
(v) Unregistered Shareholders and Buyback
The amended Regulations also allow an unregistered shareholder to participate in the buyback process.
(vi) Reduction of Share Capital
A company is not permitted to buyback its shares, unless the consequent reduction of its share capital is effected.
Analysis of the Changes
The new Buy-back Regulations are an intent on the part of the Government to bring more clarity and simplification in the provisions pertaining to buyback. Some of the important implications of these changes are:
(i) Introduction of the term “buyback period” has brought more clarity in the provisions. It helps in assessing the applicability of and compliance with the Regulations in a better manner.
(ii) By updating the references in consonance with the Companies Act, 2013, the amended Regulations have harmonised the buyback provisions as provided under the companies law and those provided under SEBI.
(iii) The conversion of cash component of escrow account to an interest-bearing account, is a welcome proposal. An interest-bearing account would not let the money stagnate and this would incentivise and encourage shareholders to sell off their shares to the company.
Despite these benefits, the amended Regulations, by allowing unregistered shareholders to participate in the buyback process, may open floodgates of confusion. Unregistered shareholders, may not have the necessary documents for a share transfer and this may lead to improprieties in the buyback process. Moreover, the new provision pertaining to a mandatory reduction of share capital may impose an unnecessary burden on the companies.
A buyback is often resorted to by companies when the share prices are low so as to conduct an Initial Public Offering (IPO) later on when the prices soar. The buyback process should be stringent enough to prevent any improprieties on the part of the company and provide protection to shareholders and at the same time a little flexible. The amended Regulations have introduced clarity and a structured framework in the buyback process. These changes would go a long way in improving the buyback mechanism in India.
Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at firstname.lastname@example.org.