The Securities and Exchange Board of India (“SEBI”) in an announcement in December 2022 made changes to the share buyback norms intending to gradually phase out the buyback of shares via the stock exchange route. SEBI has done this by amending the share buyback norms for listed companies and by making changes to disclosure requirements. This will limit the route for a share buyback to only the tender route. This move seems to be a follow-up to the public consultation paper introduced by the SEBI sub-group headed by HDFC chairman Keki Mistry in this regard at the beginning of September.
Till the time share buybacks are permitted through the exchange route stock exchanges will have to operate a separate window for this purpose. The reason behind these restrictions is to prevent the apparent favouritism which takes place when share buybacks take place via stock exchanges. Under the new regulations as introduced by SEBI Companies are required to use 75% (Seventy-five per cent) of the buyback proceedings as well as a reduction of the time when share buybacks are open to 66 (sixty-six) days from the present 90 (ninety) days. The upward revision of the buy-back price is now allowed until one working day before the record date. The regulations by SEBI also reduce the timeline for completion of buybacks through the tender method by 18 (eighteen) days.
Salient Features of the Announcement
Separately, SEBI has permitted market infrastructure institutions to create separate business verticals for business development and risk management to ensure arm’s length operations between the various business operations and the critical operations of the institution. SEBI has also mandated market infrastructure institutions to appoint directors with experience in areas of technology, law and regulatory, finance and accounts and capital markets. The new framework for stock exchanges is most likely in response to the co-location scam perpetuated by the former director of the National Stock Exchange of India Ms. Chitra Ramakrishnan which was deemed to be a serious breach of corporate governance norms. The protection of shareholders is additionally in focus following the scams at MCX as well as unsuccessful Initial Public Offerings which eroded returns for minority holders. SEBI has also decided to go ahead with proposals for Execution Only Platforms (“EOPs”) for direct plans in the case of mutual fund schemes. The new rules aim to make it convenient for investors to make investments via EOPs and include investor protection mechanisms, cyber security requirements, pricing of services and grievance redressal. SEBI has also reduced the time taken for registration of foreign portfolio investors (“FPIs”) to facilitate ease of operations. In the area of investor protection, SEBI has also made changes to corporate governance norms by mandating that Key Managerial Personnel of every such organization must have their position as well as their roles and responsibilities. Each of the KMPs must be specified in terms of the hierarchy and the nature of their roles within the organization in comparison to other employees. Additionally, a special code of conduct has been instituted for KMPs and board members to ensure accountability in instances of wrongdoing.
SEBI has also moved to provide light-touch regulation for investment advisors and stockbrokers that offer only execution services concerning direct plans of mutual fund schemes. Considering several disruptions faced by investors SEBI also mandated that stock exchanges will introduce a specialized platform for the reduction of risks faced by investors as well as the redressal of such risks. SEBI had announced that large stockbrokers termed Qualified Stock Brokers (QSBs) which are an integral part of the economy will face greater compliances as a part of the enhanced monitoring by the regulator as well as by the stock exchanges. Further, SEBI has allowed Alternative Investment Funds (AIFs) to participate in the credit default swap market both as a protection buyer and a seller subject to specific conditions. Within permitted levels Category I and II AIFs are also permitted to sell credit default swaps without having underlying government bonds.
By accepting the recommendations of the various authorised sub-groups SEBI has attempted to provide a dynamic regulatory framework for investors. The directions which follow successive financial scandals are the regulator’s responses to market events. The main impact these changes are envisaged to have on the market is the additional compliances pertaining to reporting of transactions on QSBs in the short term and greater scrutiny and eventually greater protection of investors in the long term.