Here is the full piece:
SEBI has proposed to improve the current set of regulations
governing buy back of equity shares of listed companies by floating a discussion
paper on the subject. The paper proposes significant changes in the current
regulatory framework. None of the reasons provided by SEBI convince, though
SEBI has its heart in the right place. In fact the proposals will hurt those it
seeks to protect and SEBI needs to reconsider it move.
The current buy-back law is broadly set out in the Companies
Act which governs all companies. In addition, SEBI prescribes additional
standards which would apply to listed companies. Buy-back of shares are
permitted for the following three stated reasons. First, return of surplus cash
to shareholders. Second to support share price during periods of temporary
weaknesses. Third, to increase the value of the underlying shares.
SEBI in the paper believes that there is a problem with one
of the modes of buy-backs i.e. the buy back through stock market purchases. The
other major form of buy back through a tender offer is not the subject of
proposed changes. The problem as stated, is that companies announce a buy-back
of shares for a period of 12 months at a maximum price, however, they often do
not acquire substantial number of shares from the market as there is no
requirement of buying a minimum number of shares. Further SEBI believes the 12
months permitted is too long a period and should be shortened to a 3 month window.
Lastly, it seeks to introduce two cooling off periods, one on further capital
raising for 2 years (though the Act provides only for a 6 month cooling off)
and the other against a follow on buy-back offer for one year if the previous
buy-back isn’t 100% used. In addition, there is a proposal that buy-backs in
excess of 15% of the capital of the company would not be permitted at all
through the exchange route.
None of these are useful. Before analysing these changes it
is useful to remember the two classes of shareholders who are impacted by
buy-backs. One is the shareholders who sell back their shares to the company
and the other is the surviving shareholders of the company who have decided not
to sell their shares and wish to continue to be shareholders of the company. It
is important to note that between these two classes of shareholders, it is a
zero-sum gain. Thus any gain offered to exiting shareholders is automatically a
loss to the surviving shareholders. Seen another way, the bounty which SEBI is
seeking to bestow on exiting shareholders and speculators will be at the cost of those who have the most
confidence in the company and who most need SEBI’s protection. Further, by tying
the hands of management and sending them
to the stock markets for a boxing match is bound to have an adverse
consequence on the company and thus on the surviving shareholders.
A buy-back operates at two levels. One is a psychological
one and the other is a ‘money-where-your-mouth’ level. At a psychological
level, a company merely by announcing a buy-back is telling its shareholders
that it believes that its stock is undervalued and under the other hypothesis
it is willing to put its cash to purchase shares from its most pessimistic
shareholders and thus increasing price and value. The price of a listed share
is a dynamic number which changes every micro-second. Thus a company’s mere
announcement of a buy-back is likely to increase its price and it is difficult
to predict how this beast will react in trillions of microsecond in a year. For
SEBI to second guess this task for a whole year, which is difficult even for
the management of a company is micro-management. How many shares are bought
from the market should thus be left to the discretion of the company’s
management. If the price has shot up based on the announcement and some minimal
purchases, the management should be free to discontinue the purchases till such
time as the price falls again. In fact, if the market price is above the book
value of the company, every purchase it makes will be value destructive for the
existing shareholders. Thus a mandatory minimum purchase is unnecessarily
restrictive at best and value destructive at worst for the surviving shareholders
whose interests SEBI should protect. The minimum quantity which should be
mandated should thus ideally be 0% as is prescribed by the Companies Act.
Similarly, restricting the buy-back period from 12 months to
3 months takes away the benefits of a buy-back for a longer period of time
without any benefit to anyone. In extended periods of pessimism and downturn
which we have witnessed since 2007, keeping a conditional safety net for a
whole year would be a good thing for shareholders not something which should be
outlawed as impermissible.
In addition both cooling offs, particularly on further
capital raising can hurt a company. A company which has used its cash in a
buy-back may in a few months require money for a new attractive project or a
joint venture. In a dynamic and highly competitive world to tie a company’s feet
for 2 years by barring them from capital expansion can be the equivalent of
sending it into the competitive boxing ring without the ability to move forward.
This is clearly not in shareholder interest as the parliament has figured out.
Whether or not SEBI’s provision contradict statutory laws or not, this is a not
a wise regulatory move.
Finally, to mandate that buy backs over 15% of the capital
may not be through a market purchase would in fact create a negative sum gain.
It is well understood that market purchases are more tax efficient and open
offers less so. The former is entitled to capital gains exemption while the
latter gets no such benefit. Thus in
this move, SEBI would hurt not merely the surviving shareholders but also its
departing ones. It would be good for SEBI to tighten disclosure and mis-conduct
norms of insider trading in buy-backs rather than second guess and restrain
management in its honest and nuanced buy back efforts.
No comments:
Post a Comment