Delay in new buy-back norms stirs a controversy

Rashmi Das

More than a month after the terrorist attacks in the United States and half a dozen statements made by two Cabinet ministers, the amendments relaxing share buyback norms are yet to see the light of the day.

The finance ministry wanted to ease share buyback to boost the capital market, though many have questioned this wisdom, especially in view of the current state of the stock market.

Meanwhile, there have been reports that the delay in getting the amendments through has been due to some differences between the finance ministry and the department of company affairs (DCA), though Arun Jaitley, the minister concerned with the latter laughs-off any such suggestion.

The finance ministry has been pushing hard for reducing the lock-in period for issue of fresh securities by corporates after buyback of shares from two years to six months. The government also proposes to permit companies to buy back their shares with the approval of the board of directors, exempting them from taking shareholders’ approval.

After some initial reluctance, the DCA has finally agreed to the finance ministry’s proposal. An ordinance in this regard is expected soon after Cabinet approval, most likely this week.

The government is also likely to remove the cap of buyback beyond 25 per cent of the equity of a company in a year. The rationale given for the argument is that the 25 per cent requirement could be done away with provided the post-buyback 2:1 debt equity requirement is retained.

But questions are being raised over the delay in implementing these proposals and the manner in which the government is going about it.
Says Congress leader and former finance minister, Pranab Mukherjee, who is also the chairman of the parliamentary committee on home affairs: “Any legislation having financial ramifications should not be done through an ordinance.”

Shardul Shroff, managing partner of the leading law firm Amarchand Mangaldas, said the government should have responded quickly. “Clearly the trigger has been the September 11 attack, which needed an urgent response. The DCA should have addressed the issue not through changes in the law but through a guideline with a sunset clause,” said Mr Shroff.

Not only the methodology but also the content of the proposed changes has evoked criticism. According to Mr Mukherjee, any amendment in the law during volatile market conditions will only foment speculation.

“There is no tangible proof that changes in buyback provisions will prevent the market from being bottomed out and inject stability,” he said. Any legislative change must be effected only when the markets are stable, he added.

Industry sources said the government had also not consulted experts on the proposed changes, something which the DCA has often done in the past.

The moment has clearly been lost. “After September 11, the Federal authorities in the US reacted by modifying buyback rules and norms in relation to listing. In India, it has taken more than four weeks to come to grips with the issue,” says Mr Shroff. The appropriate measure for the government would have been to draw up emergency guidelines in consultation with experts rather than amend the law, Mr Shroff added.

In case the 25 per cent cap on buyback operations is removed, there should be a certification process by the board of directors for unsecured creditors, and trade-related credit must be included in the debt equity ratio of 2:1, he added.

In any case, experts feel that the buyback operation must be backed by stringent disclosure norms. Companies must inform both the market regulator and the exchange concerned about their decision to buyback shares especially in view of the fact that buyback decisions are proposed to be taken by the board of directors instead of shareholders’ resolution. That would also set to rest concerns about the interests of small shareholder.

According to Mr Shroff, the debate will tend to be disclosure-centric because buyback norms will be amended in tandem with the norms governing creeping acquisition. In fact, there has been a suggestion from legal quarters for setting up a draft model for a disclosure regime jointly by the Securities Exchange and Board of India (Sebi) and DCA.

Moreover, in the background of allegations of a promoter-institution nexus, the disclosure norms must include tracking trade in stocks of companies going in for buyback for the preceding six months, Mr Shroff said. According to stipulations under the current dispensation, buyback has to be completed within 12 months from the date of passing of the special resolution.

The logic given for buyback in the Companies (Amendment) Act 1999 was said to inhibit hostile bids or takeovers, it was a mechanism to return surplus cash to the shareholders and offer support for stock prices during times of temporary weakness. Any amendment would ultimately be judged upon this original mandate of the Act, feel experts.