IGI Logo

Quote on Sebi Board Meeting Decision on Buyback of Shares By Nilesh Sharma, Executive Director, Samco Securities

The capital market regulator Securities and Exchange Board of India (Sebi) has effected some changes in its Buy-back Regulations at its Board meeting held in Mumbai on December 12, 2022. How it is going to impact the retail investors, explains Sharma.

In a Buyback announcement, the Companies announce a buy back price, which is generally at a premium to the current market price (CMP), in order to make the Buy-back offer attractive to the investors.

In the Stock Exchange (SE) Route (Open Market), companies can buy back their shares directly from the stock market via the exchanges, by-passing the Shareholders. While in the Tender Route Buy-back, shareholders need to offer their shares for the buy back to the Company.

The issue with the SE Route is that even though the Buyback was announced at a premium, the shares are bought at the market price which is at times way below the Buyback Announcement Price.

While in the Tender Route, the shareholders have to tender the shares to the Company. Most of the times, a portion of the shares tendered, would be accepted on proportionate basis and the balance will be returned back to the shareholders. The accepted shares are bought by the Company at a Buyback Announcement Price, which is at a premium to CMP, thus benefiting the shareholders. Also, most of the Share Buyback offers have a special quote for retail shareholders, improving their acceptance ratio and thus putting them at a better position than their larger counterpart, the High Networth Individual (HNI) Shareholders.

Recently, Paytm (One 97 Communications) announced its Buyback through stock exchange route at a price of Rs 810 which was at a 50% premium to CMP of Rs 540. However, this announcement was not well received in the market and the stock tanked 2% the very next day.

Compare this to the latest TCS Buyback, where the retail acceptance of shares was at 26% while for HNI’s, the level of acceptance was only 2.5%, thus helping the retail shareholders to sell a part of their holding at a premium value of Rs 4,500, when the then CMP was around Rs 3,600.

“The Tender Route is extremely beneficial for the retail shareholder and phasing out the stock exchange route should be seen as a positive step for the retail shareholders”, Sharma added.

Platform for Risk Reduction Access to Investors – A Welcome Step

“The proposed platform for Risk Reduction Access (RRA) to Investors is a welcome step for investors & especially for day traders. The RRA will enhance the safety in trading at the client level, providing confidence to the investor to trade comfortably.

Many brokers provide leverage on intra-day orders & if due to any disruption, such Intraday orders could not be squared off, it can result into a major loss to the client (trader) in case of Gap up/Gap down opening the next day. Also, in case of Intra-day short sale of shares, many a times traders do not own the shares and along with price risk, would also be exposed to auction price mechanism risk and other exchange charges. “This RRA will save such traders & investors during disruption and the clients would not have to bear the brunt of issues in the Broker’s systems”, Sharma said.

QSB concept to help mitigate concentrated risk

Enhanced Risk Management framework for Qualified Stock Brokers (QSB) will help mitigate a wide spread risk in the capital markets. QSBs are the large brokers, who have significant market share as well as the number of investors registered with them.

The stock broking Industry has seen concentration of investors and turnover with Top 5 brokers, having more than 50% of the total active clients and average daily turnover (ADT) in the retail segment. “The move by the regulator will also be more practical as it will not see all brokers with the same lens in respect of compliances and the QSBs would be subject to enhanced monitoring & provide a sigh of relief to small sized brokers across the country from the unnecessary compliance burden”, Sharma said.

Above views are of the author and not of the website kindly read disclaimer