Introduction

In December 2022, SEBI’s Board approved certain amendments to the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 (the “Existing Regulations”). These amendments were published on February 7, 2023, pursuant to the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations, 2023 (“Amendment Regulations and with the Existing Regulations the “Buyback Regulations”). The Amendment Regulations come into force from the 30^th day of their publication in the official gazette, i.e. on March 9, 2023. The emphasis of several of the amendments was on simplifying the buyback process, by eliminating certain methods of buyback and reducing overall timelines.

Key Amendments

• Draft letter of offer
  The Amendment Regulations have deleted the concept of a draft letter of offer and associated review by SEBI in the context of a buyback under the tender offer route. The manager to the buyback is now responsible for certifying to SEBI that the letter of offer is compliant with the Buyback Regulations and that such letter of offer contains the information required under the Buyback Regulations.
  Given SEBI’s intention of completing the buyback process within a short time frame and the elimination of review by SEBI, this is likely to pose challenges from a timing standpoint for companies that require exemptive relief (i.e. in a scenario where shareholders from the United States of America, hold more than 10% of the shares of such companies) under the Securities Exchange Act of 1934 from the SEC of the United States of America. This is because such companies, which previously required exemptive relief, utilised the time taken by SEBI to review the draft letter of offer to obtain such relief, before dispatching the letter of offer. The direct dispatch of the letter of offer in the revised regime is likely to impact the exemptive relief process.
  Further, given that the letter of offer is dispatched pursuant to a compliance certificate issued by the manager to the buyback, the manager’s role has significantly been enhanced.

• Record date
  While the purpose of the record date continues to be to determine the entitlement and names of the shareholders of the company, who are eligible to participate in/ tender their shares in a buyback, several key additional activities are now linked to the record date.
  In the context of a buyback under the tender offer route, these include dispatch of the letter of offer to shareholders (within two working days of the record date) and opening of the tendering period for the buyback (within four working days of the record date). In the context of a buyback from the open market under the stock exchange route, the offer is to open within four working days from the record date.

• Reduction in the tendering period
  The Amendment Regulations provide for a reduction in the number of days for which the tendering period is open for participation/ tendering by eligible shareholders from 10 working days to five working days. While this change is likely to quicken the overall buyback process, companies which require exemptive relief from the SEC of the United States of America, will now need to factor in the reduced number of days in the tendering period as part of their application process.

• Price increase
  The board of directors of the company now has the flexibility (in a tender offer buyback) to increase the maximum buyback price and decrease the number of securities proposed to be bought back, such that there is no change in the aggregate size of the buyback. This flexibility is available until one working day prior to the record date and is likely to be a useful method of generating participation in a buyback, particularly if there is substantial time between the date of the board approval and the date of opening the buyback.

• Lender covenants: The buyback related documents are required to contain disclosures related to consents obtained by companies from their lenders for buybacks.
• Open market buyback (stock exchange) versus open market buyback (book built)
  Buybacks from the open market through the stock exchanges are subject to the following limits (both in terms of size and time):

A company is now required to ensure that:

• A minimum of 75% of the amount earmarked for an open market buyback under the stock exchange route is utilised for the buyback;
• A minimum of 40% of the amount earmarked for the buyback is utilised within half the duration specified in the Buyback Regulations;
• Only frequently traded shares are bought back and such buyback is subject to restrictions on placement of bids, price and volume as specified by SEBI; and
• the buyback offer closes in the following manner:

One of SEBI’s objectives in the discussion paper on Existing Regulations issued in November 2022 was “streamlining the process of buybacks from the open market, that is, through the book-building process and through stock exchanges, with a view to making such process robust, efficient, transparent and shareholder-friendly”, and keeping in mind this objective, SEBI has introduced provisions governing a buyback through the book built process. These include, pricing norms for frequently and infrequently traded shares, price ranges within which shareholders can place bids, and placing restrictions on promoter participation in such a buyback. Pursuant to the Amendment Regulations, from April 1, 2025, buybacks from the open market through the stock exchanges are not permitted.

The open market through stock exchange buyback method has up to now been the second most popular route of undertaking a buyback, and the book-built buyback process has been rarely used. The Amendment Regulations gradually phase out (i.e. by limiting the overall number of shares that a company can buyback under this route from year to year) and eventually eliminate the stock exchange buyback, from April 2025.  It remains to be seen whether the demise of the buyback under the stock exchange route would resurrect the book-built buyback.

• Escrow
  The key change to the escrow requirement is that the escrow deposit must be completed within two working days of the public announcement. SEBI has also now permitted additional methods of escrow deposit. These are:
  – Cash including bank deposits with any scheduled commercial bank;
  – Deposit of frequently traded and freely transferable securities;
  – Government securities;
  – Units of mutual funds invested in gilt funds and overnight schemes; or
  – A combination of foregoing.
• Miscellaneous Amendments
  A company is now required to complete verification of offers and make payment to shareholders/ return unaccepted shares within a period of five working days from the closure of the tendering period, with the process of extinguishment now involving a secretarial auditor instead of a statutory auditor. The maximum buyback size is 25% or less of the aggregate of the paid-up capital and free reserves of a company, based on the standalone or consolidated financial statements of the company, whichever sets out a lower number. Finally, pursuant to the Amendment Regulations, odd lot buybacks have been eliminated.