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Regulatory Insights
21 February 2023
Buy-back of securities regulations amended to streamline process of buy-back from open market, refine process of buy-back through tender offers and review timelines for buy-back
Background
The Securities and Exchange Board of India (SEBI) notified1 the SEBI (Buy-Back of Securities) (Amendment) Regulations, 2023 (Amended Regulations) amending the SEBI (Buy -Back of Securities) Regulations, 2018 (SEBI Buy-Back Regulations).
Through these Amended Regulations, SEBI has brought about numerous changes to the regulations considering the following objectives:
• Streamlining the process of buy-back from the open market through a book-building process.
• Ref ining the process of buy-back through tender offers.
• Reviewing the timelines for buy-back.
The amendments will come into effect from 9 March 2023.
Key highlights of the amendment
1. Conditions for buy-back of shares and specified securities
• The maximum limit of any buy-back, i.e. 25% or less of the aggregate of the paid-up capital and free reserves of the company, will be now based on the standalone or consolidated financial statements of the company, whichever sets out a lower amount.
• On similar lines, the debt equity ratio (i.e. the aggregate of secured and unsecured debts owed by the company to the paid-up capital and free reserves) after buy-back will also be based on the standalone or consolidated financial statements, whichever sets out a lower amount.
• The SEBI has also introduced the maximum limit in terms of ‘number of equity shares’ by clarifying that in
1 Notification No. SEBI/LAD-NRO/GN/2023/120 dated 7 February 2023
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respect of equity shares bought back in any financial year, the maximum limit will be 25% and will be construed with respect to the total paid-up capital of the company in that financial year.
2. Deletion of odd-lot method of buy-back and introduction of a glide path to phase out the open market buy-back from stock exchanges
• The method of buy-back of shares or other specified securities through odd-lot holders has now been deleted.
• Additionally, SEBI has introduced a glide path for phasing out the method for open market buy-back from stock exchanges as well as the time limits for buy-back completion, as represented in the below table.
Parameter Current thresholds (till 31 March 2023)
With effect from 1 April 2023
With effect from 1 April 2024
With effect from 1 April
2025
Maximum limit2 15% of paid-up capital and f ree reserves
10% of paid-up capital and free reserves
5% of paid-up capital and free reserves
0% of paid-up capital and free reserves Time limit f or
completion of buy- back offer
Within six months Within 66 working days
Within 22 working days
NA
3. Filing of letter of offer for buy-back through tender offer
• A company is now required to file the final letter of offer with SEBI through a merchant banker within two working days of the public announcement. Previously, the ‘draft’ version was required to be filed within five working days of the public announcement.
• The merchant banker to certify (in the format prescribed by SEBI) that the buy-back offer is in compliance of the SEBI Buy-Back Regulations and that the letter of offer contains the information required.
• The above changes are made to simplify the process and reduce the timelines. The obligations to ensure that the letter of offer is in compliance with the regulations is now upon the merchant banker.
4. Offer procedure for buy-back through tender offer
• The letter of offer and tender form will now be dispatched electronically to the security holders ‘within two working days from the record date’.
• The date of the opening of the offer will be ‘not later than four working days from the record date’ instead of f ive working days from the date of dispatch of the letter of offer. Moreover, the buy-back offer period will remain open for a period of five working days instead of 10 working days.
• Payment of consideration to those holders of securities whose offer has been accepted and returning the remaining securities to the securities holders to be done within five working days of the closure of the offer.
5. Escrow account in case of buy-back through tender offer and buy-back through stock exchange
• The SEBI has specified that the deposit to the escrow account should be made within two working days of the public announcement.
• SEBI has stated that escrow accounts will be subject to margins specified by the Board. Previously, the SEBI Buy-Back Regulations did not have provisions for SEBI to prescribe margins.
• Additionally, the following changes are being made in relation to the constitution of the escrow account:
2 The limits will be based on the standalone or consolidated financial statements of the company, whichever sets out a lower amount.
- ‘Bank deposits’ have been included.
- It is clarif ied that the bank guarantee in favour of the merchant banker should be issued by a scheduled commercial bank.
- Deposit of ‘acceptable securities’ is now substituted with the term ‘frequently traded and freely transferable equity shares or freely transferable securities’.
- Government securities and units of mutual funds invested in gilt funds and overnight schemes have been included.
• Where part of the escrow account is in a f orm other than cash, a sum of not less than 2.5% of the total amount earmarked for buy-back as specified in the Board Resolution or Special Resolution, as applicable will be deposited in an escrow account opened with a scheduled commercial bank. Previously, the requirement was 1% of the total consideration payable.
6. Buy-back from open market
Open market buy-back through stock exchange
• The SEBI has increased the limit of minimum utilisation of the earmarked amount for buy-back, from 50% to 75%. Additionally, 40% of the amount earmarked for buy-back should be utilised within the initial half of the specified duration.
• Buy-back through stock exchange can be made only in respect of frequently traded shares. Accordingly, the def inition of frequently traded shares has been inserted in the Amended Regulations as below.
[f requently traded shares’ shall have the same meaning as assigned to them under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011]
• Additionally, the buy-back will be subject to the restrictions on placement of bids, price and volume as specified by SEBI.
Open market buy-back through book building
• SEBI has replaced the regulations applicable for disclosures, filing requirements and timelines for public announcement, the offer procedure and methodology of the book-building process by inserting regulations 22A, 22B, 22C, 22D and 22E in the Amended Regulations.
• The key highlights of the newly inserted regulations are as below.
- Public announcement to be done within two working days from the date of approval from the board of directors or shareholders, as the case may be, of the company.
- The book building process will commence within seven working days from the date of the public announcement.
- Buy-back offer to be kept open for a minimum of two trading days, and the payment of the
consideration should be made withing a period of five working days from the date of closure of the offer.
- Retail investors will have the option to bid at the buy-back price. It is further clarified that promoters, along with their associates, will not be permitted to participate in buy-back through book building.
- If the bid size is more than the buy-back size, the price at which 100% buy price is reached will be the buy-back price and shares or other securities tendered at or below buy-back price will be accepted at the buy-back price and in proportion to bids size received.
- If the bids are less than the buy-back size, all the shares or other specified securities will be accepted at the highest bid price.
- The SEBI has prescribed the price range for the buy-back in case of frequently traded and infrequently traded securities. The same is detailed as below.
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Type of securities Minimum buy-back price Maximum buy-back price Frequently traded securities Not less than the higher of the
f ollowing:
a) Closing price of the securities on the date of the notice as per Schedule VI (newly inserted) b) Volume weighted average market
price of the share or other securities of the company in the 15 trading days prior to the date of the intimation of the meeting of the board of directors approving the buy-back.
Upper end of the price range as approved by the board of directors of the company or its shareholders and the book value of the shares or other specified securities.
Inf requently traded securities Not less than the price determined based on the report of a registered valuer.
7. Other amendments
• For maintaining consistency, SEBI has prescribed that all timelines will be set out in terms of ‘working days’
instead of calendar days.
• A separate window to be created by stock exchanges for buy-back through stock exchanges.
• All f ilings with SEBI will now be made in the electronic mode which will be digitally signed by the Company Secretary or person authorised by the board of the company.
• While destroying the certificates bought back the presence of the Secretarial Auditor of the company has been mandated instead of the presence of Statutory Auditor. Additionally, a certificate of compliance from the Secretarial Auditor (earlier, Statutory Auditor) will be submitted to SEBI.
• Lenders’ prior consent is additionally required for buy-back in case of a breach of any covenant with such lender, and the letter of offer will contain a specific disclosure of such consent.
• The SEBI has additionally provided flexibility to the company to increase the maximum buy-back price and decrease the number of securities proposed to be bought back in such a manner that the aggregate size of the buy-back does not change, and such change can be done till one working day prior to the record date.
The takeaways
The amendments are aimed at making the buy-back process more robust and transparent by curbing existing drawbacks in the regulations. The SEBI has provided the pathway for discontinuing the buy-back of securities f rom open market through the stock exchange in a phased manner, as this method may not have been equitable to all types of shareholders and their interests, especially retail shareholders.
The SEBI has also provided a revised mechanism for buy-back from open market through the book-building process to bring about more certainty in terms of the pricing specifically considering the bi-furcation between f requently and infrequently traded securities and the methodology of acceptance of bids.
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In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corpora te Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
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