With the entire world locked down due to the spread of COVID-19 pandemic, regulators in India have been granting exemptions, extensions and relaxations in various compliance requirements under the applicable law.
While the issue relating to filing of offer documents with Securities and Exchange Board of India (SEBI) and tendering shares during window closure stands addressed, it is not clear how the companies will be able to send the letter of offer to shareholders whose details are not available as they have not furnished details in electronic mode with the listed entity. Additionally, the hardship faced by shareholders holding shares in physical form remains unresolved. With market prices crashing and prohibition of physical transfers, they will neither be able to transfer the shares nor participate in the buy-back.
Buy-back of Securities
With the share price of all listed entities touching an all-time low, several companies have considered this as an opportune time to buy-back the shares. Several public announcements have been made in the past 10 days for buy-back of shares by way of tender offer as well as from the open market through market purchase.
The companies are aiming to achieve the following objectives through buy-back as per the rationale disclosed by listed entities:
(a) Fairer valuation of the company’s stock price;
(b) Improve key return ratios like return on net worth, return on assets, etc, over a period of time;
(c) Create long term value for shareholders;
(d) Return cash to its shareholders holding equity shares broadly in proportion to their shareholding, thereby enhancing the overall return for them;
SEBI Relaxes Operational Procedure
Market regulator SEBI, vide circular dated 26 March 2020
has relaxed operating procedures in relation to buyback by requesting the merchant bankers and other market intermediaries to submit the PDF copies of reports under Regulation 10 (7)of SEBI (SAST) Regulations, 2011, exemption applications, public announcements, detailed public statements, draft letter of offer and other relevant documents at [email protected]
Earlier, companies were required to submit hard copies and soft copies to SEBI through the merchant banker and were also required to upload through SEBI intermediary portal at https://siportal.sebi.gov.in
Prohibition on Tendering of Physical Shares
The listed entities continue to include the following paragraph in their public announcement while dealing with the procedure for buy-back of physical shares:
“All Shareholders of the Company holding Equity Shares in physical form should note that pursuant to provisions of the proviso to Regulation 40(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time (“SEBI Listing Regulations”) read with press release no. 12/2019 dated March 27, 2019 issued by SEBI, with effect from April 1, 2019, the request for transfer of securities shall not be processed unless the securities are held in dematerialised form with a depository. Accordingly, the Company shall not accept the Equity Shares tendered under the Buy-Back unless such Equity Shares are in dematerialised form.”
It is, indeed, surprising that listed entities regard buy-back as equivalent to transfer of shares, while this actually results in extinguishing of shares. I have discussed the same at length in my previous article titled "Can Physical Shares Be Offered For Buyback?"
During the period of lockdown, why would a shareholder open a demat account simply to tender shares for buy-back? There is an urgent need for SEBI to intervene and clarify at the soonest.
Tax on Buy-back
While Section 115 QA introduced in Budget 2013 applied to buy-back of shares by unlisted companies; the final budget – 2019 extended the applicability of Section 115QA of the Income Tax Act, 1961 to the buy-back of shares listed on a recognised stock exchange for all public announcement made after 5 July 2019.
Accordingly, any amount of distributed income by the Company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
With the end of financial year approaching, time is ticking towards closure of the trading window from the end of quarter until forty-eight hours after the information becomes generally available. While, SEBI has granted an extension for the convening of board meetings for submission of financial results for the quarter and financial year ended 31 March 2020, there is no extension for commencement of trading window closure. Accordingly, all listed entities will be required to close trading window for the listed securities from 1 April 2020.
Buy-back During Trading Window Closure
SEBI vide Securities and Exchange Board of India (Prohibition of Insider Trading) (Second Amendment) Regulations, 2019 inserted Para 4 (3) (b) in Schedule B (which specifies minimum standards for code of conduct for listed companies to regulate, monitor and report trading by designated persons) from 25 July 2019 to the following effect:
(3) The trading window restrictions mentioned in sub-clause (1) shall not apply in respect of –
(b) transactions which are undertaken in accordance with respective regulations made by the board such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.
Accordingly, all designated persons can also tender their shares held in the buy-back undertaken by the listed entity.
(The writer is senior partner, Vinod Kothari & Company)