FE Editorial : Sebi takes stock

Market regulator's proposals on the right track

In its latest attempt at strengthening the rulebook, the capital markets regulator's focus is on buybacks of shares by companies. Noting that several companies in the past have not been serious about share buybacks, Sebi now suggests that it be mandatory for a company to buy at least 50% of the proposed quantum of shares. So far, Sebi has asked merchant bankers to make sure that at least a fourth of the amount is bought back. Increasing this to 50% would seem to be a fair proposition because, at the end of the day, an announcement to buy back shares must be accompanied by the intent to buy. Sebi's research shows that companies have, on average, completed 50% of the buyback which, in itself, is not a bad number. However, there have been instances where companies have not bought a single share and that is unpardonable. Asking companies to set aside 25% of the maximum amount that would be needed to buy back the shares in an escrow account would prevent any flippant behaviour from corporates as would the suggestion that companies be barred from hitting the market for money for two years following the buyback. However, Sebi's wanting to crash the time frame for the buyback to three months from one year at present seems a somewhat stiff condition. Even if empirical evidence shows that 49% of the total shares bought were picked up in the first three months of the buyback period, it's a fact that markets can be volatile and, therefore, it's only fair to give the company enough time to complete the purchases; not all stocks are large and liquid and there are mischief makers who could queer the pitch.

Overall, it's encouraging that the regulator has shown little leniency with companies. In May 2012, for instance, Sebi modified the consent order norms saying any cases related to insider trading practices or other fraudulent practices would not fall within the ambit of consent orders. On the other hand, Sebi has also made life easier for companies that need to place out shares to conform to the listing requirements by introducing mechanisms like the Offer for Sale. It's up to companies now to win the trust of shareholders.

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