Sebi scans companies' share buyback record

Ashish Rukhaiyar
Mumbai, 30 June 2011

Regulator against repeated buyback offers, given the potential for misuse

The Securities and Exchange Board of India (Sebi) is taking a serious note of companies that have made buyback offers a habit. It has indicated that companies that had made such offers and not bought back a significant amount of shares won’t get approval for a fresh buyback.

According to persons familiar with the development, the capital markets’ regulator is perturbed by the trend of companies making buyback announcements to push the stock price. They then close the offer without buying back a significant number, even when the shares trade at a price lower than the buyback offer. Sebi made its views clear in a recent order, too.

"Repeated buyback offers is not something that Sebi, as a regulator, would like to encourage, given that it could be misused by entities to consolidate their holding at the expense of the company," it said in the matter of Deccan Chronicle Holdings. In a buyback, funds from the company reserve are used, to buy and extinguish the shares, thereby reducing the entity’s equity base.

Companies use buyback as an attractive tool to manage the stock price, as any such announcement sends a positive signal to investors. Even short sellers stay away from such counters, since any fall beyond a certain level can be stopped by buying back shares. Such announcements have been a favourite resort during a bearish phase.

According to data on the website of the Bombay Stock Exchange, buyback offers of Allied Digital, Balrampur Chini, FDC, Infinite Computer Solutions, SRF and FDC are currently on. In the past, Balrampur Chini, Reliance Industries, Prime Securities, Reliance Infrastructure, Hindustan Unilever and SRF have come out with more than one buyback offer. “Many companies make buyback announcements just to create a positive sentiment around its counter,” said an investment banker who has managed these.

“Till a few years earlier, there were even instances of companies allocating a certain amount of money for buyback and hardly using any of it,” he said, wishing not to be named.

This is not the first time the regulator is tightening these norms. A couple of years before, it had come down heavily against companies making ‘hollow’ buyback offers. In an informal warning to investment bankers, it directed them to disclose the minimum number of shares a company intended to buy. A buyback offer was not allowed to be closed till this was done.

Sebi rules say a company can buy back its shares without a shareholders’ resolution if the total amount allocated for doing so is less than 10 per cent of its paid-up equity capital and reserves. Buyback can only be up to 25 per cent of the paid-up capital and reserves and anything in between has to be approved by shareholders.

SEEKING FULL DISCLOSURE
* Sebi against companies making repeated buyback offers
* Such buyback offers can be misused at the company’s expense, says Sebi
* Companies use buyback as a tool to create positive newsflow
* Companies announce buyback, but few shares are actually bought back
* Sebi has tightened buyback norms in the past, too
* Companies directed to disclose the minimum number of shares to be bought back