This article has been written by Ms. Drishti Rawat, a second-year student at National Law University, Delhi.

Abstract

The Securities and Exchange Board of India (SEBI) has put in place regulations and guidelines aimed at regulating share buybacks by companies listed on Indian stock exchanges. The objective is to balance enabling buybacks as a legitimate corporate action while also instituting safeguards against market manipulation and protecting minority shareholder interests. This article examines key aspects of the SEBI (Buyback of Securities) Regulations, 2018 that provide the framework for buyback implementation and disclosure norms for listed companies. The regulations define quantitative limits, pricing formula, modes of buyback, time gaps required between buybacks, and compliance requirements. The article also discusses the various restrictions imposed by SEBI to prevent misuse of buybacks for purposes like artificial inflation of stock prices or consolidating promoter control. These include prohibitions on timing, promoter transactions, insider trading as well as requirements of board/shareholder approval and due diligence by merchant bankers. The article analyzes how the SEBI regulations attempt to achieve the twin regulatory objectives of supporting value-enhancing buybacks while also emphasizing high governance standards, transparency and minority shareholder rights. The continuing debates around whether SEBI has found the right balance are also explored. 

Introduction

A share buyback, also known as a share repurchase, refers to a company buying back its own outstanding shares from existing shareholders. The objective is generally to return surplus cash to shareholders, consolidate promoter shareholding, improve financial ratios like earnings per share (EPS) and return on equity (ROE), or signal that its shares are undervalued. However, buybacks could also be misused by companies to artificially inflate share prices or to consolidate promoter control at the expense of minority shareholders.    

The Securities and Exchange Board of India (SEBI) has instituted regulations and guidelines aimed at introducing transparency and protections while also enabling companies to undertake buybacks as a legitimate corporate action. The regulatory framework attempts to strike a balance between allowing value-enhancing buybacks while also safeguarding against abuse and manipulation. 

This article has discussed key aspects of SEBI’s buyback regulations, the safeguards instituted against market manipulation, and how the guidelines attempt to achieve the twin goals of supporting corporate actions while also emphasizing shareholder protections and high governance standards. The debates around whether SEBI has found the right balance will also be explored. 

SEBI Regulations on Buybacks

The legal framework governing share buybacks is contained in Sections 68, 69 and 70 of the Companies Act, 2013 along with the SEBI (Buyback of Securities) Regulations, 2018. The Companies Act lays down the broad conditions and parameters for buybacks while the SEBI regulations provide the detailed implementation framework.   

The SEBI regulations have put in place both quantitative and procedural restrictions on buybacks to prevent abuse. Key aspects include: 

1. Limits on Quantum: The maximum buyback of shares allowed in a financial year is 25% of the total paid-up equity capital and free reserves of the company. This ensures that buybacks do not excessively deplete the net worth and capital adequacy of the company.    
2. Sources of Funds: The buyback must be financed only through the company’s free reserves or securities premium account. Borrowed funds cannot be utilized which prevents deleterious effects on the company’s debt-equity ratio. 
3. Pricing Formula: The buyback price cannot exceed 25% of the volume weighted average market price of the shares over the preceding three trading days. This mechanism prevents artificial inflation of prices.   
4. Modes: Buybacks can be transacted through the open market method, tender offers or odd-lot holdings. Each mode has specific requirements aimed at orderly and transparent buyback implementation.  
5. Time Gaps: A company can undertake only one buyback exercise in a period of one year. This prevents large-scale buybacks in a short span of time.   
6. Exit Offer: Where a buyback results in the public shareholding in a company falling below the minimum required level, the acquirer is mandated to give an exit opportunity to remaining shareholders through a buyback.  
7. Disclosures: Detailed disclosures need to be made in newspapers, stock exchanges, etc. at various stages. A merchant banker is required to submit a due diligence report to SEBI.  

The buyback regulations thus address key aspects like limits, pricing, modes, time gaps and disclosures to bring transparency and fairness for minority shareholders while enabling companies to undertake genuine buybacks. However, SEBI has been criticized for making the framework procedurally cumbersome. 

Safeguard against Market Regulations

Concerns regarding misuse of buybacks in India  

SEBI aims to prevent the misuse of share buybacks for purposes like manipulating share prices or consolidating promoter control. Indian markets have traditionally witnessed insider trading and self-serving actions by promoters at the expense of minority investors. Hence safeguards are essential.   

Key restrictions imposed by SEBI    

• Ban on buybacks during certain periods: Buybacks are prohibited during fund raising exercises like rights issues which can artificially inflate prices and mislead investors.   
• Additional conditions for promoter buybacks: Stricter norms on pricing, time gaps between buybacks, and minimum buyback size are imposed when the promoter seeks to consolidate shareholding.    
• Prohibition of insider trading: Promoters and connected persons cannot transact in the company’s shares during the buyback period to prevent price rigging.  
• Spreading out open market buybacks: Buying has to be spread over time through multiple orders to avoid concentrated impact on stock liquidity and prices.   
• Approval requirements: Board and shareholder nod through special resolution makes arbitrary decisions difficult. 
• Role of merchant banker: Appointed to ensure compliance and conduct due diligence to prevent abusive transactions. 

Criticisms of overregulation    

Industry participants argue that these strict regulations excessively constrain even genuine buybacks serving legitimate corporate objectives. The time and cost involved make buybacks unviable even when the intent is not manipulative.    

Counterview on the need for strong minority shareholder protections 

However, the counterview is that Indian markets suffer from especially poor governance and low transparency. Retail investors are vulnerable to insider actions by promoters. Hence strong safeguards are essential even at the cost of ease of conducting buybacks. The cautious regulatory approach acts as a deterrent against manipulation.   

In conclusion, SEBI aims to strike a balance between allowing genuine buybacks while instituting firm safeguards. The debate continues on whether the regulations have gone too far and made even legitimate buybacks difficult for companies. But SEBI reiterates the vulnerabilities of Indian shareholders to unscrupulous actions by promoters. 

Balancing Corporate Action and Governance 

The SEBI regulations on buybacks attempt to balance two goals – facilitating value-enhancing buybacks as a useful corporate action while also emphasizing shareholder protections against potential abuse.   

Enabling legitimate buybacks 

SEBI recognizes that buybacks can serve legitimate business objectives like returning surplus cash, consolidating capital structure or signaling undervalued shares. The regulatory framework enables companies to undertake such beneficial buybacks subject to prescribed norms and transparency requirements.  

Mechanisms to prevent abuse   

At the same time, SEBI has instituted mechanisms aimed at preventing manipulative actions that could adversely affect minority shareholders. These include:  

• Transparency through disclosures: Detailed disclosures and filings at various stages bring openness. 
• Limits and pricing formula: Quantitive restrictions on the extent of buyback and pricing prevent arbitrary actions.    
• Empowering non-promoter shareholders: Approval requirements give them a say to block self-serving buybacks.   

Calls to review strict norms 

Industry participants contend that the procedural complexity and stringent compliance norms have made even genuine buybacks extremely difficult. They call upon SEBI to review and relax certain norms while retaining key shareholder safeguards.   

Reflecting SEBI’s governance focus    

SEBI has reiterated that the regulations reflect the priorities of high governance standards and retail investor protection vital in the Indian context. However, SEBI has shown openness to reviewing market feedback and fine-tuning regulations where feasible without diluting shareholder rights.   

In conclusion, the buyback regulations attempt a challenging balancing act – facilitating legitimate buybacks as a useful corporate tool but subjecting them to checks and balances to protect shareholders from abuse in the Indian context. Ongoing debates continue on whether the right balance has been achieved. 

Conclusion

The SEBI regulations on share buybacks attempt to strike a fine balance between recognizing buybacks as a valid corporate action while also instituting mechanisms to prevent manipulation and protect minority shareholders. The rules enable companies to undertake genuine buybacks that can benefit shareholders through payouts, signaling value etc. But given the Indian context, SEBI has also put in place quantitative restrictions, pricing formula, prohibitions on insider trading, requirements of board and shareholder approval etc. to safeguard against potential misuse by promoters for self-serving objectives. The regulatory framework aims to bring transparency through disclosures at multiple stages and oversight by merchant bankers to enable orderly implementation of buybacks.   

Ongoing debates continue on whether SEBI has found the right balance or made compliance overly cumbersome even for legitimate buybacks. Industry voices suggest fine-tuning norms to ease the process without diluting shareholder rights. However, SEBI reiterates the vulnerabilities of Indian markets to governance issues and insider actions which warrant caution. Overall, the regulations demonstrate SEBI’s emphasis on minority shareholder rights while supporting value-adding corporate actions, but achieving the right balance remains a work in progress. 

References

1. This article was originally written by S. Gopalan and V. Misra published on Business Standard website. The link for the same is herein: https://www.business-standard.com/article/opinion/making-it-easier-for-cos-to-buyback-shares-119120501421_1.html
2. This article was originally written by P. Jain published on The Hindu BusinessLine website. The link for the same is herein: https://www.thehindubusinessline.com/markets/stock-markets/sebi-mulls-easing-buyback-norms/article32595661.ece
3. This article was originally written by R. Mody published on Mint website. The link for the same is herein: https://www.livemint.com/market/mark-to-market/buybacks-set-to-become-attractive-11602769802112.html
4. This article was originally written by S. Nithya published on Mint website. The link for the same is herein: https://www.livemint.com/Money/bvqZp8FkenhfkaMDwjRUvM/SEBIs-buyback-rules-are-restrictive.html
5. This article was originally written by M.T. Raju published on BusinessLine website. The link for the same is herein: https://www.thehindubusinessline.com/markets/stock-markets/buyback-tax-removal-simplification-of-process-could-boost-investor-interest/article32729783.ece
6. This article was originally written by Reuters published on Reuters website. The link for the same is herein: https://www.reuters.com/article/india-markets-buyback-idINKBN27D1D2
7. This article was originally written by D. Shah published on Financial Express website. The link for the same is herein: https://www.financialexpress.com/opinion/decoding-share-buybacks/1708859/ 
8. This article was originally written by M. Vyas published on The Hindu BusinessLine website. The link for the same is herein: https://www.thehindubusinessline.com/markets/stock-markets/rules-eased-for-buyback-through-open-market/article34949596.ece 
9. This article was originally written by Securities and Exchange Board of India published on SEBI website. The link for the same is herein: https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-buy-back-of-securities-regulations-2018_37269.html
10. This article was originally written by Ministry of Corporate Affairs published on MCA website. The link for the same is herein: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
11. This article was originally written by Reserve Bank of India published on RBI website. The link for the same is herein: https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Securities%20Market