The Securities and Exchange Board of India (SEBI) recently announced new restrictions on companies opting for share buybacks through the stock exchange route. The move comes in response to concerns about potential abuse of the buyback mechanism by companies to manipulate stock prices, thereby harming the interests of shareholders and investors.

Share buybacks involve a company repurchasing its own shares from the market, usually at a premium over the prevailing market price. Companies may opt for buybacks as a way of returning surplus cash to shareholders, improving earnings per share, or reducing the dilution of equity due to stock options or other incentives.

However, there have been instances where companies have used buybacks to artificially inflate their stock prices or manipulate market sentiments. For example, a company may buy back its shares and then sell them later at higher prices, or use buybacks to prop up its stock price when there is negative news or a drop in demand.

SEBI has therefore proposed several new restrictions on the use of stock exchange mechanisms for share buybacks. These include:

– Companies must not have more than 25% of the total buyback size through the stock exchange mechanism: This means that companies cannot use the stock exchange route for more than one-fourth of the total size of the buyback. The remaining 75% must be through the tender offer mechanism, where shares are directly offered to shareholders at the buyback price. This requirement is intended to prevent companies from artificially inflating their stock prices by buying back too many shares through the stock exchange.

– Daily trading limits on stock exchange buybacks: Companies using the stock exchange route for buybacks will now be subject to daily trading limits. These limits will be set at 25% of the average daily trading volume for the previous two weeks. This restriction is intended to prevent companies from buying back shares at higher prices by flooding the market with buy orders.

– No price manipulation through buybacks: Companies are prohibited from buying their shares at a price higher than the highest price traded on the stock exchange during the preceding six months. They are also forbidden from buying shares during the last half hour of trading on the day of buyback. These measures are intended to prevent companies from artificially inflating the price of their shares through buybacks.

Overall, SEBI’s new regulations for share buybacks via the stock exchange route are aimed at promoting greater transparency and accountability in the markets. By limiting the use of this mechanism by companies and imposing strict trading limits and pricing restrictions, SEBI hopes to prevent market manipulation and protect the interests of shareholders and investors.

However, some critics have raised concerns that these new restrictions may reduce the flexibility and autonomy of companies to manage their own finances. For example, the requirement that 75% of the buyback size must be through the tender offer mechanism may make it more difficult for companies to execute buybacks quickly or efficiently.

Moreover, the daily trading limits could result in companies having to stretch their buyback programs over a longer period, thereby increasing their costs and reducing the benefits to shareholders.

Despite these concerns, SEBI’s move to regulate share buybacks via the stock exchange is a positive step towards ensuring fair and transparent market practices. Companies must now be more cautious in their use of buybacks and ensure that they are being used for legitimate purposes rather than for market manipulation.

Moreover, shareholders and investors can now have greater confidence in the integrity of the markets and the fairness of company practices. Ultimately, this is good news for stakeholders and for India’s economy as a whole, as it promotes greater stability and trust in the financial system.

In conclusion, SEBI’s new restrictions on share buybacks via the stock exchange are a welcome move towards greater transparency and accountability in the market. While there may be some challenges and trade-offs involved in implementing these regulations, the benefits of promoting fair and honest practices far outweigh any costs. It is important for companies to embrace these regulations and ensure that their buyback programs are conducted with the highest standards of ethics and integrity. With the right balance between regulatory oversight and corporate autonomy, India’s financial markets can continue to grow and flourish for the benefit of all.