MoF, Sebi for reducing lock-in period to one year

DCA to soft-pedal on easing of buyback guidelines

Sourav Majumdar, Veeshal Bakshi & Rashmi Das

Mumbai/New Delhi, Sept 20: The Department of Company Affairs (DCA) has said it will not rush into easing of norms on buyback of shares, in the wake of the crash in stock prices, even as the ministry of finance is pushing it for an early announcement.

DCA sources said ministry of finance and the Securities & Exchange Board of India (Sebi) want an amendment in the existing buyback norms immediately by reducing the two-year restriction on issue of fresh securities by a company after the buyback to one year as it believes the move will revive the capital market. However, DCA wants to be fully convinced on the benefits which will accrue from this move.

The market has been agog with speculation that the government would come forward with a proposal to liberalise share buyback any day. However, the DCA’s stance implies that imminent action is unlikely.

Minister for law and company affairs Arun Jaitley told The Financial Express that there have to be “prolonged discussions within the government preceding any final decision” on buyback norms. He added this would include detailed discussions with the ministry of finance.

Sources said Mr Jaitley is expected to meet finance minister Yashwant Sinha soon to discuss easing of buyback norms. DCA officials said the two-year restriction was laid down in Section 77A of the Companies Act after lot of deliberations in the standing committee of the ministry. “We need to hold detailed consultations and study the implications for reducing the lock-in period rather than hurrying the issue,” a senior DCA official said.

DCA officials suspect that the buyback mechanism can be used by corporates to manipulate the market and ascertain the floor price of its shares. “By using capital reserves of the company for buy back operations, companies in the long run also run the risk of unfavourable loan terms with the financial institutions,” sources explained.

Even as the government debates the buyback proposal, a section of the market which believes a powerful lobby is at work to restrict such liberalisation only to index companies, has urged that the facility be made available to all corporates across the board.

Majority of market players want that the proposed new norms should apply to all companies, and not just a few. Market players say a section is at work to try and get the liberalisation of existing norms restricted to only the larger companies comprising the benchmark stock indices.

Corporate and market circles in Mumbai are abuzz with talk that besides buyback norms, guidelines governing creeping acquisition of shares by promoters are also set to be liberalised.

The chief argument in favour of covering all companies under liberalised norms is that there are several mid-sized technology companies which may like to avail of the buyback route to reduce their equity base, and even warehouse the rest of the capital. Some may even want to get their companies delisted and later issue fresh shares to a foreign partner in return for technology support.

“The removal of the ban on issuing fresh shares after a buyback must, therefore, be applicable to all companies and not just to a few big ones,” a leading investment banker told The Financial Express.

Sebi, on the other hand, said any move which would allow more buying in the market was a welcome step, but said buyback rules were essentially a matter concerning the Companies Act.

Frontline market players pointed out that the capital market is in doldrums and most corporates have been moving to try and get their balance sheets debt-free. Interest rates have now dropped to much lower levels and if a company does want to expand, it was highly unlikely that with the present situation in the market, it would raise fresh capital.

“Consequently, no fresh issue is being contemplated for another 2-3 years. But if the ban on fresh issue of capital post-buyback goes, then companies may like to go in for the buyback route to shore up promoter holdings and at the same time improve valuations,” sources said.

In fact, corporates and market players say banks should also be allowed to fund creeping acquisitions and buybacks. Creeping acquisition funding, they said, should be linked to the opening of a separate demat account for those shares which are acquired through this route, so that promoters don’t get the opportunity to reintroduce those shares in the market for speculative purposes.