Buybacks via exchange route to be phased out

To create level-playing field for all investors, says Sebi chief

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Governance boost at market infra institutions

The Securities and Exchange Board of India (Sebi) on Tuesday gave its nod to phase out share buybacks through the open market. The market regulator has also approved steps to ensure governance boost at the stock exchanges as well as other market infrastructure institutions at its board meeting.

Buybacks will be undertaken through a separate window on stock exchanges till the time they are permitted through the exchanges. The minimum utilisation of the amount earmarked for buybacks through the stock exchange route has been increased from existing 50% to 75%.

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The timeline for completion of buybacks will be reduced by 18 days and upward revision of buyback price will be allowed until one working day prior to the

record date. These amendments aim to streamline the buyback process, create a level-playing field for investors and promote ease of doing business.

“We feel that the tender route is the more equitable route for buybacks. Others are vulnerable to favouritism because nobody really knows when the company is going to come 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,” said Sebi chairperson Madhabi Puri Buch.

A number of proposals that were part of the consultation paper were not taken up by the board. The Sebi chairperson said several buyback relaxations pertaining to the Companies Act will be discussed with the ministry of corporate affairs and will be taken up at an appropriate time. The regulator will engage with the finance ministry over taxation on buybacks. From 2019, buybacks are taxed in the company’s hands at 20% plus surcharge and is tax-free in the shareholders’ hands.

The functions of MIIs will be categorised into three verticals. The first is critical operations. The second involves regulatory, compliance and risk management, and the third includes other functions such as business development.

MIIs have to give higher priority to resource allocation towards the first two verticals.

“MIIs wear multiple hats and we felt that the three roles they played were not getting equal importance. The systems MIIs run are not proprietary but in the nature of public infrastructure. The changes are aimed at making their operations a lot more balanced,” said the Sebi chairperson.

The MIIs will be required to mandatorily appoint public interest directors (PIDs) with background and expertise in the areas of technology, law and regulatory, finance and accounts and capital markets. PIDs will continue to meet every six months, and will now submit a report to Sebi after the meeting in addition to submitting a report to the MII board.

Also Read: Sebi to cut timeline to clear IPO documents

A sharper code of conduct will be applicable to the MIIs, the governing

board, directors, KMPs and committee members. Further, board members and KMPs will be held accountable if they are aware of wrongdoings and do not appropriately report the same.

The Board has recommended that additional items such as board minutes of such entities relating to regulatory, compliance and risk management need to be disclosed on their website. These institutions are also required to set up an investment committee, which will be responsible for evaluating investments made by such entities.

“The fact that institutions like stock exchanges always had a dual role previously has been well understood and now with this categorical segregation will over time strengthen these important institutions even further,” said Yash J Ashar, partner, Head – Capital Markets, Cyril Amarchand Mangaldas.

The Board has introduced an enhanced risk management framework for brokers designated as qualified stock brokers. These would need to comply with enhanced risk management practices. Stock exchanges will introduce an investor risk reduction access platform to enable clients complete pending orders during periods of disruption in broker services.

AIFs have been allowed to participate in credit default swaps, not only as protection buyers, but also as protection sellers, subject to conditions for risk mitigation.

The Board has streamlined the on-boarding process for FPI registration by allowing scanned copies of application forms, digital signatures, use of SWIFT mechanism for certification and verification of PAN by DDPs through the Common Application Form.

The Board also decided to introduce a regulatory framework for “execution only platforms” (EOP) for direct plans of mutual fund schemes. EOPs may be granted registration either as an agent of AMCs, registered with AMFI or as an agent of investor, registered as a stock broker.

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First published on: 21-12-2022 at 03:50 IST
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