Buyback of shares is offered by the management of companies presumably with a view to maximise the value of the shareholders, reduction of surplus liquidity and similar considerations. One of the major objectives of regulations is to permit buyback for small shareholders and, therefore, even the SEBI (Securities and Exchange Board of India) Regulations mandate reservation of 15% of the number of securities, which the company proposes to buyback.
Many small shareholders continue to hold shares in physical form. Even though SEBI has, vide SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2018, strongly motivated demat of shares held in physical form by proscribing their transfer after 1 April 2019, yet, it is a matter of common knowledge that many small shareholders, particularly those held by elderly persons, continue to be in physical form.
Can the offer for buyback be denied to such shareholders? Is buyback a case of transfer of shares to the company or simply a case of liquidation or redemption of the shares? There is a prevailing practice followed by several companies wherein the public announcement for buyback provides as under:
‘PROCEDURE TO BE FOLLOWED BY REGISTERED EQUITY SHAREHOLDERS HOLDING EQUITY SHARES IN THE PHYSICAL FORM
As per the proviso to Regulation 40(1) of the SEBI (LODR) Regulations (as amended by the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2018), effective from 1 April 2019, requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository.
In this buyback, considering the timelines of activities prescribed under the Buyback Regulations, the acceptance of tendered shares will be undertaken after 1 April 2019.
ACCORDINGLY, THE PUBLIC SHAREHOLDERS WHO ARE HOLDING EQUITY SHARES IN PHYSICAL FORM AND ARE DESIROUS OF TENDERING THEIR EQUITY SHARES IN THE BUYBACK CAN DO SO ONLY AFTER THE EQUITY SHARES ARE DEMATERIALIZED. SUCH PUBLIC SHAREHOLDERS ARE ADVISED TO APPROACH ANY DEPOSITORY PARTICIPANT TO HAVE THEIR EQUITY SHARES DEMATERIALIZED.
National Stock Exchange (NSE) Circular
In continuation of the NSE’s circular NSE/CMTR/34242 dated 22 February 2017 pursuant to the SEBI circular nos. CFD/DCR2/CIR/P/2016/131 dated 9 December 2016 and CIR/CFD/POLICYCELL/1/2015 dated 13 April 2015 regarding the mechanism for acquisition of shares through stock exchange pursuant to tender—offers under takeovers, buy back and delisting, NSE on 9 May 2019 issued circular No. 51/2019. The circular provides that all orders under tender offer mechanism on the NSE platform shall be accepted in demat mode only.
This article analyses permissibility under the provisions of law in relation to buyback of shares held in physical form.
SEBI Press Release
There is no prohibition on the investor from holding the shares in physical form; investor has the option of holding shares in the physical form even after 1 April 2019.
Any investor who is desirous of transferring shares (which are held in physical form) after 1 April 2019 can do so only after the shares are dematerialised.
The transfer deed(s), once lodged prior to the deadline and returned due to deficiency in the document, may be re-lodged for transfer even after the deadline of 1 April 2019.
There was no reference in the amendment notification or in the press release extending the restriction to corporate action, viz., buyback of securities.
Transfer of Securities
In the case of transfer of the securities, the transferor transfers the title in shares to the transferee with or without consideration. Transfer of securities held in physical form is governed by Section 56 of Companies Act, 2013.
The transfer is registered by the company if a proper instrument of transfer, in Form SH-8, duly stamped, dated and executed by or on behalf of the transferor and the transferee specifying the name, address and occupation, if any, of the transferee has been delivered to the company. The instrument should be delivered by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.
In case of securities held in demat, the beneficial owner effects the transfer of securities by submitting a delivery instruction slip to the depository (registered owner). Such transfers are outside the purview of Section 56 of the Companies Act, 2013.
Buyback of Shares
In general terms, buyback is a procedure wherein the company makes an offer to its existing shareholders to purchase its shares at a specified price.
In case of buyback of shares held in physical form, the company extinguishes the share certificate (destroys/ purges the physical share certificate) so bought back. Therefore, this cannot be regarded as transfer of securities as referred in Section 56 of Companies Act, 2013 or referred in Regulation 40 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
As per Para (p) of SEBI Circular dated April 13, 2015 one of the disclosures required to be given in public announcement for buyback regulations is ‘Methodology for placement of orders, acceptances and settlement of shares held in dematerialised form and physical form’. Additionally, para (q) of the SEBI circular provides as under:
‘(q) Participation by Physical Shareholders With regard to the participation of shareholders holding physical shares, the procedure similar to the buyback for physical shares through the open market method of buyback as specified in regulation 15A of SEBI (Buyback of Securities) Regulations, 1998 shall apply.’
Regulation 19 of SEBI (Buyback) Regulations, 2018 corresponds to Regulation 15A of SEBI (Buyback of Securities) Regulations, 1998 and provides as under:
‘19. A company may buy-back its shares or other specified securities in physical form in the open market through stock exchange by following the procedure as provided hereunder:
(i) A separate window shall be created by the stock exchange, which shall remain open during the period of buy-back, for buy-back of shares or other specified securities in physical form.
(ii) The company shall buy-back shares or other specified securities from eligible shareholders holding physical shares through the separate window specified in sub-regulation (i), only after verification of the identity proof and address proof by the broker.’
Despite permissible provisions under SEBI (Buy-back of Securities) Regulations, 2018 in relation to buy back of shares held in physical form and SEBI press release clarifying that there is no prohibition to hold shares in physical form, the NSE circular prohibits acceptance of orders under tender offer, unless held in demat mode. Listed entities are incorporating similar restrictions in the public announcement made by them.
The practice followed is not in line with the provisions of the law. Buyback of shares cannot be treated at par with transfer of securities as both operate under two different provisions under the Companies Act as well as are governed by separate SEBI regulations. There is an urgent need for SEBI to issue a clarification especially in the interest of shareholders holding shares in physical form.
(CS Vinita Nair is partner at Vinod Kothari & Co)