SEBI- NEW BUYBACK AND FII NORMS

By Ruma Dubey

On 13^th June, Chidambaram had held the Press Conference and assured us all that things will soon start moving. He has stated then itself that SEBI will be meeting on the 25^th of June for taking up the recommendations made by the Chandrasekhar Committee on FII investment. Well, as promised the meeting did happen yesterday and SEBI seems to have accepted the recommendations.

So what exactly has SEBI cleared yesterday? A quick synopsis…

BUY BACK NORMS

• New buyback norms wherein 50% of the earmarked funds for buyback is utilised by the company as against the existing 25%, failing which amount in the escrow account would be forfeited subject to a maximum of 2.5% of the total amount earmarked.
• Maximum buy-back period has been reduced to 6 months from 12 months
• Companies shall create an escrow account towards security for performance with an amount equivalent to at least 25% of the amount earmarked for buy-back.
• No further raising of capital and buy back allowed for a period of one-year from the date of closure of the buy back.
• Companies shall create an escrow account towards security for performance with an amount equivalent to at least 25% of the amount earmarked for buy-back.
• Promoters of the company shall not execute any transaction, either on-market or off-market, during the buy-back period.

These are very good and relevant moves planned by SEBI. We have been seeing how the stock price of a company zooms up to new highs the moment it announces a buyback. Some rogue companies announce a buyback to merely jack up their price and once the buy back is over, which is spread over a year, by that time, it is seen that the liquidity has vanished from the stock and investor is stuck. Hopefully by reducing this window from 1 year to 6 months and keeping a watch on the objective of the buyback announced and imposing a penalty, SEBI is trying to curtail this manipulation.

But most are of the view that putting this mandate of 50% buyback is not company friendly. Suppose a company announces a buyback at Rs.50 and on announcement, if the share price moves to Rs.100, it would not make sense for the company to go ahead with the buyback at Rs.100 to keep up with the 505 mandate as it will hurt the financials of the company. But then, this argument is relevant for companies where the only purpose of the company was to enhance the share price. Thus keeping a watch on the objectives of the buyback money being raised is very relevant.  Yet, the fear is also very real – what if the company is sound and its purpose is also above board and yet, if the share price doubles, will it be able to afford the buyback? Some provision to help overcome this needs to be done or else the manipulators will continue to have a field day at the cost of the company.

LISTING OF SMEs & START-UPs WITHOUT IPOs

• SEBI has approved the proposal to amend the SEBI (ICDR) Regulations to permit listing of Start-ups and SMEs in Institutional Trading platform (ITP) without having to make an IPO.
• Minimum amount for trading or investment on the ITP will be Rs 10 lakh.
• These companies shall be exempted from having to offer upto 25% of its shareholding to public through an offer document in order to get listed. 
• While listed on the ITP these companies will not be permitted to raise capital though they can continue to make private placements.

This move to list SMEs and start-ups is to provide an exit route to Angel Investors, VCFs and PE etc. to provide better visibility, wider investor base and greater fund raising capabilities to such companies. This platform will most likely turn into a gamblers den and we might witness rampant manipulation.

FII INVESTMENT NORMS

Here, SEBI has accepted the recommendations made by the Chandrasekhar Committee and this includes:

• Merging FIIs, sub accounts and Qualified Foreign Investors into one class - of foreign portfolio investor (FPIs). It excludes NRIs and foreign venture capitalists
•  Reduce the KYC process for well-regulated entities
• Do away with direct registration of FIIs with SEBI. DDPs authorized by     SEBI would register FPIs on behalf of SEBI subject to compliance with KYC requirements.
• To  split FPIs into three categories based on risk — Category I — low risk (central banks, sovereign wealth funds), Cat II — moderate risk (regulated entities such as banks, asset management companies, broad based funds already registered with Sebi) and Cat III — high risk and has kept the KYC formalities minimal for the first two categories.
•  Investment by any single investor or investor group that exceeds 10% equity of an Indian company will be considered foreign direct investment.

Accepting the Chandrasekhar Committee report is the step in the right direction especially now when we need FDI and FIIs to stay put in India. These new simplified SEBI norms are sure to make it easier for FIIs to come to India. These norms will not turnaround the sentiments but yes, procedural hurdles, making FIIs jump hoops will ease. 

SEBI will now submit all these recommendations to the Finance Ministry and it might take 2-3 months or even more for all this to finally take off.