Buyback of Securities in Times of Crisis
There has been an increasing number of buyback announcements in the last two months by cash-rich companies like Emami, Thomas Cook and Sun Pharma. With COVID-19 taking a huge toll on the economy, the investor confidence has also seen a decline. With an aim to restore the investor confidence and stabilize their stock prices, companies have resorted to buyback mechanisms, which makes it imperative to analyze the current legal framework to determine the possible setbacks the companies might face while undertaking such measures. The provisions regarding buyback of securities in India are incorporated in Sections 68-70 of the Companies Act, 2013 (“the Act”), supplemented by SEBI (Buyback of Securities) Regulations, 2018 (“the SEBI Regulations”). This legal framework aims to provide a comprehensive set of rules that effectively regulates the system of buyback of securities, endeavoring to protect the interests of the investors when companies employ this mechanism of capital restructuring. Through this paper, an attempt is made to critically analyze this legal structure to determine the scope for misuse by companies and the possible hurdles they might be presented with in these unprecedented times.
Withdrawal of Buyback Offers after Announcement:
Before 2018, companies could announce buyback schemes to generate investor interest and reap the benefit of higher market value of securities while choosing to not implement the same later. The favorable sentiment pursuant to announcement of buyback schemes raises the share prices and attracts more investors. Companies capitalize on this loophole to earn higher profits or stabilize their share prices and subsequently frustrate their buyback scheme. In the case of D-Link (India) Ltd. v. SEBI, SEBI contended that since the company did not implement the buyback scheme pursuant to the shareholders resolution and capitalized on the market sentiment by misleading its investors, it should be penalized. However, the Securities Appellate Tribunal (SAT) held that since there is no mandatory obligation to buy back the shares after passing of a resolution, the company did not engage in any illegal practice.
However, Regulation 24(d) of the SEBI Regulations purported to deal with this issue by mandating that a company shall not withdraw the offer to buy-back after the draft letter of offer is filed with SEBI or public announcement of the offer to buy-back is made. This would ensure that only genuine buyback offers would be made and malpractices like insider trading and market manipulation could be controlled. However, SEBI has not taken a very stringent approach towards the same. It allowed PC Jeweller to withdraw its buyback offer a short while after it made the announcement, citing lack of bank approval for disbursement of the cash as the reason. Similarly, KPR Mill withdrew its buyback offer after the 2019 Budget proposed to impose an additional tax of 20 percent in case of repurchase of securities by Indian listed companies.  This indicates that the withdrawal of buyback offers can be done in situations like policy changes or circumstances that were not envisaged by the company at the time of making the offer. This provides hope for those companies that proposed buyback offers before the pandemic and now wish to withdraw them. The circumstances produced by COVID-19 are unprecedented and would definitely warrant a withdrawal of buyback offer, should a company get the board approval to do so. It would not fall within the purview of mala fide tactics that aim to mislead investors and earn higher profits.
Lack of Regulation of Buyback Price:
While Section 68 of the Act is silent about the pricing of the buyback, Regulations 5(iv)(c) and 5(v) of the SEBI Regulations state that the board resolution authorizing the buyback of securities should specify the maximum price at which the tendered buyback shall be made. However, it still fails to provide any guidelines for setting the price of the tendered buyback. The pricing guidelines are provided only when the buyback is made from the open market through the stock exchange or the book-building process. The Act or the SEBI Regulations do not contain any provisions governing the prices at which the companies can buy back their securities through tendered offers, thereby giving companies unconstrained freedom and power to fix the price. At first glance, this seems like a lucrative option for companies because they could set the price at any value, based on the market price or the book value. The buyback price does not need to conform to its nominal value, thereby conferring flexibility upon companies to modify the price arbitrarily to either bolster or stabilize its prices in the market. For instance, when faced with negative market situation, companies set a high buyback price, attempting to demonstrate their assessment of the share value in the market. This artificial inflation of their share prices boosts investor confidence and assists the company in coming out of the slump. However, misuse of this freedom can lead to SEBI investigations for insider trading and market manipulation. In 2005, Abbott India Limited fixed the price at which the buyback was proposed at Rs. 650, as opposed to the book value of Rs. 141.65 per share prevailing in the market, providing an attractive opportunity to the existing shareholders to reduce their shareholdings in the company. However, as this exit price was much lower than the price of the company’s shares subsequent to the buyback, Abbott India Ltd. was accused of securing undue benefit for its promoters. It failed to disclose all the information about its market projections and priced the shares at a very high price, attempting to manipulate gullible shareholders into reducing their shareholdings to their subsequent disadvantage. This is similar to insider trading strategies adopted by unscrupulous companies, wherein they buy their securities at a lower price before the buyback scheme is announced and sell the same at the higher price prevailing in the market post the buyback. Even though Regulation 4(3) of SEBI (Insider Trading) Regulations, 1992 strictly prohibits insiders from trading in securities based on unpublished buyback information, there is a need to address the root of the problem by merely implementing pricing guidelines.
Hence, to avoid any unnecessary litigation, it would be wise for all companies adopting the tendered-offer buyback option to use the pricing guidelines established for open market buybacks until further clarity is provided by SEBI in this regard.
Certain Ambiguities under Sections 68 and 70:
The Act suffers from certain regulatory gaps and ambiguities which companies should be aware of, to ensure that the interests of their shareholders and creditors are not adversely affected. By ensuring to avoid these uncertainties before announcing a buyback, they can save the added cost and burden of future litigation.
Firstly, the Act prohibits companies from implementing buyback schemes if they fail to comply with provisions of Sections 92, 123, 127 and 129 of the Act, which require the companies to file their annual return, pay their dividend within 42 days of declaration, and prepare their balance sheet and profit and loss account to disclose the financial position of the company respectively.
However, there is ambiguity regarding the temporal limit applicable on such compliance. The Act does not clearly specify whether these requirements need to be complied with only in the year when buyback scheme is announced or in previous years as well. Furthermore, the repercussions of a few impediments in compliance with these requirements on the buyback plans of the company are indeterminate and need clarity. The Act needs to clarify whether minor nonconformities in filing of returns or accounting standards have the effect of depriving the company from implementing buyback schemes or attract some minor penalty. To avoid any problem in this regard, companies should strive to comply with all accounting standards required by SEBI.
Secondly, sub-section 7 of Section 68 requires companies to extinguish and physically destroy the securities bought back within seven days of the ‘last date of completion of buyback’. However, there is ambiguity regarding what counts as ‘completion of buyback’. If completion refers to completion of all buyback transactions, which may go on for an entire year, then it creates grey areas for application of laws. For shareholders whose shares were bought back when the scheme was introduced but the scheme continued to exist for the year, the last date of completion would mean shares bought back at the end of the year. Therefore, the voting rights for the shares given up and dividend payment, if any, accruing from such shares, remain indeterminate for the period between the two transactions, creating difficulties for the company. However, if ‘completion of buyback’ refers to the particular buyback offer made to the shareholders that is open for a period of 10 days, then much of these ambiguities will disappear.
Thirdly, Section 68(1) of the Act does not specify the temporal limit for using the proceeds from previous issue of different kind of securities. It could mean using the proceeds from issues immediately prior to conducting buyback transactions or those raised 10 years ago as well. Therefore, the limit on the use of proceeds needs to be specified. Fourthly, while Section 68(8) prohibits issue of same type of securities for 6 months after completion of buyback, it allows companies to raise funds through other kinds of securities even immediately after implementing such schemes. However, Regulation 24(f) of the SEBI Regulations prohibits companies from raising further capital for a period of one year from expiry of buyback period, thereby generating conflict with the six-month embargo provided under the Act.
Adverse Impact of Buyback on Growth and Expansion Policies:
While buyback seems like a lucrative option to ensure that companies can stay afloat in this pandemic, its adverse impact on the company’s long-term growth should not be lost sight of. The utilization of funds on buying back securities from existing shareholders results in increased earnings per share and short-term profitability without hampering the operational productivity of the company. However, it significantly reduces the existing capital base by decreasing the reserves or the share capital proceeds used for funding buyback. Therefore, the existing non-selling shareholders bear the brunt of such a reduction in the form of reduced dividends and fewer expansion opportunities. The long-term growth of the company suffers a setback when companies divest a large sum of money in buying back securities to secure higher immediate returns. Companies set aside these funds for buyback at a later date instead of using them for growth and expansion projects, thus diverting funds from prudent investments to such schemes. They fail to capitalize on long-term gains generated by such investment opportunities, focusing instead on the short-term gains resulting from the temporary market favorability created by buyback schemes. Moreover, companies become more risk-averse in their outlook as buyback is the less precarious option in comparison to other investment opportunities. This myopic vision stems from being ill-informed about buyback and its repercussions, the transient gains of buyback schemes clouding their judgments instead.
With this pandemic creating unprecedented effects on the market, it becomes extremely imperative to be aware of the legal framework to avoid any possibility of non-compliance or violations. Companies are already struggling to grapple with the lockdown and the near shutdown of the economy; adding avoidable litigation costs to this will only worsen their situation. Companies should ensure that they consider all relevant factors before announcing a buyback –the impact of a buyback on its long-term growth, withdrawal of their buyback offer, pricing guidelines governing the offer and the possible minor non-compliances and their repercussions. This will ensure that the process is conducted smoothly, without any unwelcome SEBI interferences, while also boosting investor confidence and keeping the company afloat. Moreover, these regulatory loopholes require urgent legislative intervention to ensure that there is no scope for abuse of the buyback mechanism by companies while also creating a more conducive business environment.
 Market Reaction to Buyback Announcement: Evidences from Select Indian Manufacturing Companies, C. Sivashanmugam & Sowmya. S, International Journal of Recent Technology and Engineering, Vol-8, Issue-4 (November 2019).
 Letter of Clarification for Withdrawal of Offer by PC Jeweller, available at
 KPR Mill withdraws share buyback after Budget
 Regulation 19(iii), SEBI (Buyback of Securities) Regulations 2018.
 Regulation 9(vi), SEBI (Buyback of Securities) Regulations 2018.