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SEBI to scrutinise buyback plans

Market regulator Securities and Exchange Board of India is planning to clamp down heavily on listed companies who announce buyback of shares but simply sit on it, reports Jaidev Majumdar.

india Updated: May 14, 2009 22:45 IST
Jaidev Majumdar

Market regulator Securities and Exchange Board of India (SEBI) is planning to clamp down heavily on listed companies who announce buyback of shares but simply sit on it.

The proposed tightening of SEBI norms comes in the wake of several companies announcing such buybacks in an effort to improve market sentiment but then actually buy little or nothing.

“The issue has come to our notice and we’ll take a relook at the regulations,” SEBI Chairman CR Bhave said. Bhave was in Kolkata on Thursday to inaugurate SEBI’s eastern region office.

He added that under the current regulations, imposition of any restrictions to such offers would entail litigation, SEBI, would therefore, need to amend its buyback regulations to enact any provision to ensure that a company, who once announces a buyback offer, actually buys a minimum quantity of shares.

Usually, when a company buys back its own shares, the company’s equity base reduces, which increases the earnings ratio per share and hence its price. It is also a common practice, that following a buyback announcement, promoters tend to sell a part of their holding in the company at higher prices.

In 2008, companies such as DLF and Bosch for instance, announced buyback plans of Rs 1,100 crore and Rs 640 crore, respectively. But both the companies bought back only a little of the initially announced amount. However, SEBI may have to wait for the passage of the New Companies Bill that proposes that all capital related issues of a listed company will be regulated by the market regulator, while for non-listed companies it will be the department of company affairs.

Sebi also wants to develop the corporate bond market in a more transparent way before the money mobilised under the New Pension Scheme starts flowing in. “The secondary market transactions and settlement processes in corporate debt market still works on a bilateral basis. We need to widen and deepen the corporate bond market. As of now, only few domestic institutions and foreign institutional investors are participants in this market. We need to broad base the participants,” Bhave said.