The proposals from SEBI are primarily aimed at ensuring that only serious companies launch a share buyback programme, which in turn would help in protecting the interest of investors

Mumbai: Market regulator Securities and Exchange Board of India has proposed significant changes to existing framework for buyback of shares by companies from open market, that require the process be to complete in three months and minimum repurchase to be 50% of the target, reports PTI.

The proposals are primarily aimed at ensuring that only serious companies launch a share buyback programme, which in turn would help in protecting the interest of investors.

The market regulator has proposed to make it mandatory for companies to buy back a minimum of 50% shares of the total targeted amount while the repurchase programme should be completed in three months from the launch date.

At present, the period of share buyback is 12 months.

"... it is proposed that companies complete the buy back in three months. To ensure that only serious companies launch the buyback programme, it is further proposed that these companies be mandated to put 25% of the maximum amount proposed for buy back in an escrow account," SEBI said in a discussion paper.

SEBI has sought comments on the paper titled 'Proposed modifications to the existing framework for buy back through open market purchase' till 31st January.

Making the norms stringent, the regulator has suggested that the companies, which are unable to buyback all the targeted shares (or proposed amount), should be barred from coming up with another repurchase offer for one year.

"... listed companies coming out with buyback programs may not be allowed to raise further capital for a period of two years," SEBI said.

Another suggestion is that companies should disclose the number of shares purchased and the amount utilised to the exchanges on a daily basis.

Citing buyback offer trends, SEBI said despite the intention disclosed by companies to their shareholders at the time of making buyback offer, the buyback offer is not used as an opportunity for enhancing the book value of the shares of the company.

"It has been observed that in 75 buyback cases through open market purchases, which closed during the last three financial years (from 1 April 2007 to 31 March 2010), an average of 49.91% of the maximum offer size (as disclosed in public announcement to shareholders) was utilised by the companies for the buy back," the paper said.

Further, SEBI said in many instances, companies took shareholders/board approval for buybacks but did not take a "single step to buy the shares".

Generally, buybacks are intended to return surplus cash to the shareholders, to provide support for share price during periods of temporary weakness and to increase the underlying share value.

SEBI has said share issuance on account of Employee Stock Option schemes need to be allowed during buyback period, provided that the scrips are "not allotted to directors and key managerial personnel of the company".

According to the market regulator, it would be desirable to encourage buybacks using tender method when larger amount of surplus funds are involved.

"It is proposed that buy-back of 15% or more of (paid up capital+free reserves) must be only by way of a tender offer method," the regulator said.

Through tender offer method, all shares are bought back at a fixed price which is generally at a premium to the market price. "Thus, the tender offer method of buy-back is more equitable way of distributing surplus funds with the companies to its shareholders," SEBI said.

In terms of disclosures, SEBI has said companies should reveal the total number of shares proposed to be bought back in the offer.

"Cumulative number of shares bought back till the end of previous reporting period and amount utilised for the same," should be reported.

Also, companies have to disclose the number of shares yet to be bought back and amount yet to be utilised.

Regarding physical shares, they have to tender the scrips at a "separate window in trading system".

"This window will remain open only during the buyback programme... Shareholders holding 500 shares or less in physical form will be eligible to tender their shares in this window," the discussion paper said.

Meanwhile, companies can "extinguish/destroy" shares bought back during the month, on or before fifteenth day of the succeeding month while in the last month, repurchased shares have to be extinguished within seven days of the completion of the offer.