Sebi has proposed significant changes to existing framework for buyback of shares by companies from open market, that require the process to be completed in three months and minimum repurchase to be 50 per cent of the target.
The proposals are primarily aimed at ensuring that only serious companies launch a share buyback programme, which in turn would help in protecting the interest of investors.
The market regulator has proposed to make it mandatory for companies to buy back a minimum of 50 per cent shares of the total targeted amount while the repurchase programme should be completed in three months from the launch date. At present, the period of share buyback is 12 months.
"... it is proposed that companies complete the buy back in three months. To ensure that only serious companies launch the buyback programme, it is further proposed that these companies be mandated to put 25 per cent of the maximum amount proposed for buy back in an escrow account," Sebi said in a discussion paper.
Sebi has sought comments on the paper titled 'Proposed modifications to the existing framework for buy back through open market purchase' till January 31.
Making the norms stringent, the regulator has suggested that the companies, which are unable to buyback all the targeted shares (or proposed amount), should be barred from coming up with another repurchase offer for one year.
"... listed companies coming out with buyback programs may not be allowed to raise further capital for a period of two years," Sebi said.
Another suggestion is that companies should disclose the number of shares purchased and the amount utilised to the exchanges on a daily basis.
Citing buyback offer trends, Sebi said despite the intention disclosed by companies to their shareholders at the time of making buyback offer, the buyback offer is not used as an opportunity for enhancing the book value of the shares of the company.
"It has been observed that in 75 buyback cases through open market purchases, which closed during the last three financial years (from April 01, 2007 to March 31, 2010), an average of 49.91 per cent of the maximum offer size (as disclosed in public announcement to shareholders) was utilised by the companies for the buy back," the paper said.
Further, Sebi said in many instances, companies took shareholders/board approval for buybacks but did not take a "single step to buy the shares."