The Securities and Exchange Board of India (Sebi) is planning to further empower smaller investors in buyback offers. The capital markets regulator believes that smaller investors, those holding a few hundred shares, should get the benefit of a higher acceptance ratio.
Persons privy to the development said Sebi has discussed the idea with the capital markets division in the finance ministry and is already working on the modalities. The proposed norms are in line with the regulator’s view that existing buyback regulations do not offer a level playing field between the smaller and institutional investors.
?The idea is to give more room to the smallest shareholders of the company,? said a senior Sebi official on conditions of anonymity. ?So, we want companies to mention a number and anyone holding less shares should be given higher ratio of acceptance. If there is only one entitlement ratio, then investors with a smaller base will feel a bit left out.? the official explained.
According to the norms under consideration, any company making a buyback offer will have to announce two entitlement ratios, one specifically for very small investors. The company will be required to specify a cut-off limit, in terms of the number of shares held, and any investor holding fewer shares will enjoy a higher entitlement ratio.
For instance, a company making a buyback offer can fix the entitlement ratio at 10:5 (for every 10 shares tendered, five would be accepted) for shareholders holding less than 500 shares while for all other shareholders, it could be 10:1. The regulator recently amended the norms related to buyback through tender offer route. The new regulations say that shares have to be accepted based on entitlement of each shareholder, or in other words, in proportion to their holding.
So, companies now have to announce a ratio of buyback as is the case with a rights issue. The regulator is of the view that such a move will result in ?equitable treatment? to all shareholders of the company.
The earlier norms required the company to only mention the number of shares it intends to buy back and if a large shareholder tenders its entire holding, no room would be left for minority shareholders to participate in the offer. Buyback norms have been under review for quite some time now as the regulator believes several companies have been making ?hollow? buyback offers. Many companies have announced buyback programmes without any serious intent of buying back shares. Sebi has now directed merchant bankers to mention the minimum number of shares to be bought back in the offer document.
?We understand that Sebi keeps a closer track of buybacks now expects a company to remain active in buyback window (usually a year) and also utilise a minimum portion of the offer. The recent buybacks of Zee and Reliance Infra suggest that this minimum portion could be 22-25% of the offer,? said a note by CLSA. Cash-rich promoters and companies typically use the buyback route since it supports the share price in a weak market and also boosts its earnings per share as the tendered shares are extinguished during a buyback.
The Sebi move comes at a time when many promoters are looking at buyback offers as the share price has corrected significantly. In 2011, nearly a dozen companies opted for a buyback worth more than R3,000 crore, according to Prime Database. In the current calendar year, 15 firms have already lined up buybacks, amounting to more than R2,300 crore.