SEBI to phase out buybacks on stock exchanges

In the last SEBI Board meeting conducted on 20th December 2022, SEBI made some important announcements pertaining to buyback of shares, among other things. Currently, the buyback of shares are permitted either through the stock market route or through the tender method. SEBI is of the informed view that the tender method of tendering shares for buyback was more scientific. As a result, SEBI has taken a decision in the latest board meeting to gradually phase out the buyback of shares through the stock market mechanism. However, this would be done in a phased manner over a period of time.

We will come back to this issue of phasing out the stock exchange route for buybacks in detail later. However, another interesting change made in the SEBI meet is that companies will now be permitted to utilise more funds for share buyback offers. For instance, currently as per extant SEBI regulations, companies can use 50% of their surplus funds for the purpose of buyback. Going ahead, this ratio is being enhanced to 75% of funds being permitted to be utilized for buybacks. This is likely to help improve the acceptance ratio in the buyback offers.

To ensure greater transparency in the buyback process, SEBI has underlined that the existing practice of using the secondary market exchange platforms would be gradually phased out. Till the time it is fully phased out, the exchange platform would conducted on a separate window. However, even the SEBI chairperson has specifically underlined that the regulator found the tender route option more equitable since the alternate methods are vulnerable to favouritism. In addition, the total time to buyback would also be reduced to 66 days from the 90 days, which would compress the process from end to end by 24 days.

Let us understand the tender method of buyback better. As per the definition, Tender offer means an offer by a company to buy-back its own shares or other specified securities through a letter of offer from the security holders. A company may buy-back its shares through one of the following methods viz. from the existing shareholders on a proportionate basis through tender offer; from open market via book building process or via stock exchange; and lastly from odd lot shareholders. However, the condition is that no offer of buy-back for 15% or more of the paid-up capital and free reserves of the company shall be made from the open market.

SEBI has also, in the past, had objections to the way buybacks have been taxed. For instance, effective from 2019, there is no tax on buyback in the hands of the shareholder. However, the company doing the buyback will have to pay tax at 20% in the form of dividend distribution tax (interpreted as buyback in lieu of dividends). This tax would be applicable even if the company is not liable to pay tax otherwise. SEBI has been of the view that this system of taxation is unfair to shareholders who do not tender shares in the buyback, since they end up bearing part of the cost anyways. However, this more as an adjunct issue and not exactly within the purview of the SEBI Board meeting.