Sebi, India’s capital market
regulator on Tuesday tightened the norms for share buybacks, moving to arrest
suspected misuse of stock repurchases by listed companies in recent years.
Companies would have to ensure
they spend at least 50% of the money earmarked for buybacks, the Securities and
Exchange Board of India (Sebi) said after a board meeting. That doubles the
current minimum of 25%.
Sebi’s new rules will require
companies opting to buy back shares to create an escrow account in which they
would need to keep at least 25% of the amount earmarked for the repurchases.
Should they fail to meet the
50% target, they would forfeit a sum equivalent to 2.5% of the amount allotted
for the buybacks.
In a buyback, a company
repurchases shares from securities holders, employees or on the open market,
primarily to return surplus cash to shareholders, support the stock price
during market weakness, or increase the value of underlying shares.
On 2 January, Sebi issued a
discussion paper on tightening buyback norms to prevent misuse of the route.
Of the 75 buybacks through open
market purchases in the three financial years to 2010, companies spent an
average 49.91% of the money they had allocated. According to Mint research
in January, during 2011 and 2012, out of 54 buyback announcements by listed
firms, only 18 actually took place.
Typically, when a company
announces a share buyback, investors tend to push up its stock to get a higher
price. Sebi suspected that some companies were announcing share repurchases
merely to push up their market value.
“It (the new norms) addresses
Sebi’s concerns on use of the buyback route,” said Suresh Mathew, executive
director, RPG Enterprises. “Companies will have to relentlessly pursue the
objectives of buyback after these norms are effective. The norms are
investor-friendly but companies may face problems.”
“Stock prices often start
moving up when a company announces a buyback offer. After a period, liquidity
of the stock dries up. Sebi will have to resolve this issue when such a
situation arises,” Mathew said.
On Tuesday, the capital market
regulator also reduced the maximum period available for buying back shares from
the open market to six months of the date of offer from 12 months.
Companies would not be able to
make another buyback offer within an year of the closure of the previous one.
If a company wants to buy back stock equivalent to 15% or more of its paid-up
capital, it can on do it only by way of a tender offer.
Unified foreign investment
rules
Approving a Sebi committee
report on the rationalization of foreign investment routes, the market
regulator on Tuesday also introduced uniform entry norms for existing foreign
institutional investors (FIIs), sub-accounts and qualified foreign investors
(QFIs) and combined these entities under a category known as foreign portfolio
investors (FPIs).
The amendments in overseas
investment norms are based on recommendations made by a committee on
“rationalization of investment routes and monitoring of foreign portfolio
investments”, headed by former cabinet secretary K.M. Chandrasekhar.
In order to make entry easier
for overseas investors, the regulator relaxed the norms requiring prior
registration and allowed FPIs to invest in India merely by registering with
designated depository participants on behalf of the regulator.
No FII or sub-account is
currently allowed to invest in India unless it secures Sebi approval. Some
1,759 FIIs and 6,403 sub-accounts are registered with Sebi.
The move assumes significance
in the backdrop of the government’s efforts to attract foreign fund flows as
the weakening rupee bloats the country’s import bill and widens the current
account deficit. The rupee closed at 59.66 per dollar on Tuesday.
Sebi sub-divided the FPIs,
based on risk, into three categories.
The first includes government
and government-related entities such as foreign banks, sovereign wealth funds,
multilateral organizations and so on.
The second includes banks,
asset-management companies, broadbased funds such as mutual funds, investment
trusts, insurance and reinsurance companies, university funds, pension funds
and university-related endowments already registered with Sebi.
All FPIs that do not fall in
these two categories will come under the last category, the regulator said.
The KYC (know your customer)
norms for FPIs too will be risk-based with documentation needed for the first
category, it being the simplest, and the last category the most stringent.
“The requirement of submitting
personal identification documents such as copy of passport, photograph etc. of
the designated officials of FPIs belonging to Category I and Category II shall
be done away with,” Sebi said in a statement
Further, the regulator said
that investment by any single investor or investor group that exceeds 10%
equity of an Indian company will be considered foreign direct investment.
Changes in mutual fund norms
In another key move, the
regulator approved the proposal to put in place a single self-regulatory
organization (SRO) for mutual fund distributors. In order to speed up the
process, Sebi decided to have a cut-off time for accepting applications from
potential SROs.
Further, the market regulator
has allowed asset management companies (AMC) to become members of the debt
segment of stock exchanges as long as it is meant to undertake trades directly
on behalf of schemes managed by them.
Sebi also allowed mutual funds
to appoint custodians belonging to their own group, irrespective of holdings of
the fund house’s sponsor in such a custodian.
Mutual funds are currently not
allowed to appoint a custodian belonging to the same group, if the sponsor of
the mutual fund holds 50% or more of the voting rights in such a custodian or
where 50% or more of the directors of the custodian represent the interests of
the sponsor.
The market regulator has also
relaxed norms and allowed fund houses to have custodians under their own group,
even if the sponsor of the fund house holds 50% or more in the custodian.
However, this will be allowed only if the sponsor has a net worth of at
least Rs.20,000 crore at all points of time, 50% of the custodian’s
directors do not represent the sponsor, neither the custodian nor the asset management
company is a subsidiary of each other and no person is a director of both the
custodian and the AMC.
Sebi also allowed mutual fund
distributors to take limited purpose membership of stock exchanges, similar to
brokers, but with a lesser financial and compliance burden.
The move is aimed at enabling
fund distributors to use stock exchange facilities for easier distribution and
redemption of mutual fund units.
Such members will not require
Sebi registration, compliance as members of stock exchanges, paid-up capital
and base minimum capital and so on, Sebi said.
Stock exchanges can prescribe
the eligibility criteria for such members.
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