Buybacks Via Stock Exchanges: New Rules To Curb Manipulation

SEBI's latest guidance on the buyback of shares makes buyback via the stock exchange route less attractive, suggest experts.
<div class="paragraphs"><p>SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)</p></div>
SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)

Further to its decision to phase out buybacks via the stock exchange route, SEBI has issued operational guidance restricting the placement of bids, volume and price of shares bought back through this mode.

The Securities and Exchange Board of India's circular, issued earlier this week, will make the stock exchange route for buybacks unattractive and is in line with the regulator's plan to systematically phase out this option, experts said.

Key Highlights

  • From now on, the volume of shares bought back through the stock exchange mechanism cannot exceed 25% of the average trading volume of the shares in the 10 days preceding the purchase.

  • The company won't be allowed to place bids in the pre-open market, that is the first and last 30 minutes of the regular trading session.

  • The purchase price cannot reflect a change of more than 1% from its last traded price.

This would reduce chances of market manipulation by promoters and other large shareholders, according to Manjari Tyagi, partner at Shardul Amarchand Mangaldas and Co.

The intent behind the changes is to curb potential market abuse by influencing the stock price, as both volume and price of bids by the company have been subjected to regulation.
Manjari Tyagi, Partner, Shardul Amarchand Mangaldas and Co.

This would most likely affect market participation in the buyback, said Harish Kumar, partner at Luthra and Luthra Law Offices.

Public participation in the buyback of shares would depend upon the market price for the day. If the market price is higher than the offered purchase price, the public would prefer selling their shares in the open market rather than selling them to the company.
Harish Kumar, Partner, Luthra and Luthra Law Offices

Tyagi concurred with this view. According to her, shareholders will likely find it less lucrative to participate in the buyback, as the buyback price will offer no meaningful upside to the current market price.

Although restrictive, it’s very much in line with SEBI’s plans to phase out stock exchange buybacks, said Kumar. "This does two things—it tells minority shareholders how much they can get for their shares and keeps controlling shareholders, like promoters, from getting an unfair advantage from the buyback."

The guidelines comes after the market regulator took the decision in December last year to phase out buybacks via stock exchanges by 2025.  

SEBI Chooses Its Favourite Buyback Route


Sahyaja S is a correspondent at BQ Prime. She is a lawy...more
Get Regular Updates