Open Market for Buy-Back of Securities - SEBI

The Securities and Exchange Board of India (“SEBI”) introduced the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 (the “SEBI Regulations”) with effect from September 11, 2018, which govern buy-backs undertaken by a listed company.

A listed company’s shares and other specified securities can be bought back using any of the following methods:

  • from existing holders of securities on a proportionate basis through a tender offer;
  • from the open market either through a book building process or through the stock exchange; or
  • from odd-lot holders.

While a considerable number of buy-backs in the last few years have been undertaken through the tender offer route, given the circumstances, we believe, that many listed companies may consider the open market route through the stock exchange mechanism.

Following are the key considerations in undertaking a buy-back through the open market:

  1. Are there any restrictions on the size of the buy-back and participation in a buy-back?

As a general principle, the maximum limit of any buy-back is capped at 25% of the aggregate of the paid-up capital and free reserves of the company on both, a standalone and consolidated basis. However, in case of a buy-back undertaken through the open market, the SEBI Regulations specify that the maximum buy-back limit is capped at 15% of the paid-up capital and free reserves of the company on both, a standalone and consolidated basis.

Regardless of the method adopted by a listed company to buy-back its shares/specified securities, in the event the size of the buy-back exceeds 10% of the total paid-up capital and free reserves of the company, both on a standalone and consolidated basis, the listed company is required to obtain shareholders’ approval for such buy-back.

Unlike in a buyback undertaken through the tender offer route where promoters of the company are permitted to participate and tender shares in the buy-back, the SEBI Regulations restrict promoter participation in a buy-back undertaken by a listed company from the open market through the stock exchange mechanism.

  1. Is there a SEBI review process?

As per the SEBI Regulations, a listed company undertaking a buy-back through the open market is only required to issue a public announcement containing certain mandatory disclosures and unlike a buy-back undertaken through a tender offer, the listed company is not required to file a draft letter of offer with SEBI for its review and thereafter issue a final letter of offer to its shareholders.

  1. How long is the buy-back offer required to be kept open?

In case of a tender offer, the buy-back is required to close within 10 working days from the date of opening of the buy-back. However, in case of a buy-back undertaken through the open market through the order matching mechanism, the buy-back is required to close within six months from the date of opening of the offer. In case of a buy-back undertaken through the book building method, the buy-back is required to remain open for a minimum period of 15 days and a maximum period of 30 days.

However, in the event the maximum limit, as approved by the board or the shareholders, has been exhausted, the buy-back may be closed sooner.

  1. What is the pricing mechanism for the buy-back from the open market?

In case of an open market buy-back through the stock exchange mechanism, the maximum price payable for each security to be purchased is determined by the board of directors. The listed company is required to purchase the securities in physical form at the volume weighted average market price of the shares or specified securities in the preceding week. In the event no shares or specified securities were bought back in the normal market in the calendar week, the preceding week where shares or specified securities were bought back is to be considered. However, shares or specified securities in physical form cannot be bought back by a listed company.

The price will be determined by the company and the merchant banker based on the acceptances received (which shall be the highest price accepted). Such price shall be paid to all holders tendering their shares or specified securities in case of an open market buy-back through the book building mechanism.

  1. Are there any funding requirements or escrow mechanisms required to be put in place in case of a buy-back from the open market?

In terms of the SEBI Regulations, a listed company is required to ensure that at least 50% of the amount of the buy-back (as approved by the board of director or the shareholders, as applicable) is utilised for the buy-back of shares or specified securities.

The listed company is required to keep in escrow 25% of the buy-back consideration in the form of (i) cash deposited with a scheduled commercial bank; or (ii) bank guarantee in favour of the merchant banker. In the event an escrow is created in the form a bank guarantee, issued in favour of a merchant banker, at least 2.5% of the buy-back consideration should be deposited in cash with a scheduled commercial bank.

Further, at all times, 2.5% of the buy-back consideration is required to remain in the escrow account after release of payments to shareholders and until 50% of the buy-back consideration is utilised for the buy-back.

  1. Are there any other additional compliances that are required to be followed in case of a buy-back from the open market?

In the case of all buy-backs, companies are required to comply with the requirements of making relevant disclosures to the stock exchanges under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, submitting specified documents with SEBI and the registrar of companies. In terms of the SEBI Regulations, in case of a buy-back from the open market through the stock exchanges, the listed company is also required to submit to the stock exchanges and provide on its website the information regarding the shares or other specified securities bought back. Additionally, based on the guidance provided by SEBI in the buy-backs undertaken by Mastek Limited and Sasken Technologies, we understand that based on certain representations, SEBI permitted that orders may be placed on a weekly basis.

It is important to note that while the above key considerations are to be kept in mind while undertaking a buy-back from the open market, the listed company is also required to comply with the requirements specified under the Companies Act, 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Foreign Exchange Management Act, 1999, the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and other applicable securities laws including in other jurisdictions. Additionally, listed company specific issues such as employee stock option schemes, share based schemes or depository receipts may also have an impact on buy-backs undertaken by a listed company.

In 2019, the Government had introduced in the Income-tax Act, 1961 that any amount of distributed income by the company on buy-back of shares is subject to tax in the hands of the company at the rate of 20% on the distributed income. While the number of companies undertaking buy-backs have reduced since the introduction of this tax, it will be interesting to see whether companies consider undertaking buy-backs in the present market conditions., including by using the open market route.


 

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Photo of Yash J. Ashar Yash J. Ashar

National Head and Partner in the Capital Markets Practice at the Mumbai Office of Cyril Amarchand Mangaldas. An experienced practitioner in Indian securities law, Yash has been associated with a number of capital markets transactions including initial public offerings, follow-on offerings, QIPs, rights…

National Head and Partner in the Capital Markets Practice at the Mumbai Office of Cyril Amarchand Mangaldas. An experienced practitioner in Indian securities law, Yash has been associated with a number of capital markets transactions including initial public offerings, follow-on offerings, QIPs, rights offerings, ADRs, GDRs and FCCBs.  He can be reached at yash.ashar@cyrilshroff.com‎

Photo of Nivedita Rao Nivedita Rao

Nivedita is highly experienced in a range of corporate areas, and specializes in mergers and acquisitions, foreign investment and corporate restructuring, both domestic as well as cross border. She also has extensive experience in private equity investments, joint ventures as well as a…

Nivedita is highly experienced in a range of corporate areas, and specializes in mergers and acquisitions, foreign investment and corporate restructuring, both domestic as well as cross border. She also has extensive experience in private equity investments, joint ventures as well as a range of corporate advisory matters.

Nivedita has been recognised as one of the “40 Under 45” leading lawyers in India in 2013 by Indian Lawyer 250, the official research partner of the International Bar Association, ABA Section of International Law. She can be reached at nivedita.rao@cyrilshroff.com

Photo of Janhavi Seksaria Janhavi Seksaria

Principal associate in the Capital Markets practice at the Mumbai office of Cyril Amarchand Mangaldas. Janhavi advises clients on various capital markets transactions, including IPOs, QIPs, infrastructure investment trusts, real estate investment trusts, private placements and rights offerings. She has also assisted with…

Principal associate in the Capital Markets practice at the Mumbai office of Cyril Amarchand Mangaldas. Janhavi advises clients on various capital markets transactions, including IPOs, QIPs, infrastructure investment trusts, real estate investment trusts, private placements and rights offerings. She has also assisted with the work related to the firm’s representation on various regulatory committees and assisted market intermediaries on securities laws related matters. She can be reached at janhavi.seksaria@cyrilshroff.com

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Principal associate in the General Corporate Practice at the Bangalore office of Cyril Amarchand Mangaldas. Aditya advises extensively on public market M&A; and also routinely advises clients on joint ventures and private equity transactions. He can be reached at aditya.prasad @cyrilshroff.com