The Securities and Exchange Board of India (SEBI) has amended the share buyback regulations and announced a gradual phase out of stock exchange buybacks. The regulator favours the repurchase of shares by companies from shareholders on a proportionate basis through the tender offer because that is considered more equitable, transparent, and fair.

 

What is ‘share buyback’?

  • When a listed company buys its own shares from the existing shareholders, it is known as a share buyback, which is also called share repurchase.
  • Currently, a company can buy back its shares from shareholders on a proportionate basis through a tender offer, or from the open market.
  • The maximum limit of any buyback is 25% or less of the aggregate of paid-up capital and free reserves of a company.
  • The process reduces the number of outstanding shares in the open market over a period which can lead to better valuation and earnings per share (EPS).

 

What is the stock exchange route?

  • Under this, a company can buy back shares only on the stock exchanges having nationwide trading terminals.
  • The buyback of shares is made only through the order-matching mechanism the promoters, or persons in control of a company are not allowed to participate.
  • For example, Paytm recently decided to opt for the open market route through the stock exchanges, while TCS used the tender route, Infosys opted for the stock exchange method for its recent buyback.

 

Why is SEBI against the exchange route?

  • According to the Keki Mistry committee’s recommendations, using the stock market route may result in one shareholder’s entire trade being matched with the company’s purchase order, depriving other shareholders of the advantage of the repurchase.
  • According to the SEBI, the tender route is the more equitable route for buybacks, while the other routes are vulnerable to favouritism.
  • This is because nobody really knows when the company will arrive in order to buy back shares in the exchange mechanism, and only a few people may be aware of it, and benefits may flow to those few people.
  • As recommended by the committee, SEBI will phase out buyback through the stock exchange route with effect from April 1, 2025.
  • The aim of this move is to make the buyback process more robust, efficient, transparent and shareholder-friendly, as it will give all the shareholders an opportunity to participate.

 

Significance

  • Tender offers require a reservation for small shareholders.
  • Thus, all shareholders would now be provided with an opportunity to participate in the buyback.
  • In a way it democratises the process and creates a fair and equitable platform.