Capital markets regulator Sebi on Wednesday imposed restrictions on the placement of bids, price and volume for the companies undertaking share buyback through the stock exchange route.

Buyback rules

Under the restrictions, a company will not be able to purchase more than 25 per cent of the average daily trading volume (in value) of its shares in the 10 trading days preceding the day in which such purchases are made, Sebi said in a circular.

Among others, the company will not place bids in the pre-open market, first 30 minutes and the last 30 minutes of the regular trading session and the firm's purchase order price should be within the range of 1 per cent on either side from the last traded price.

Sebi asked companies as well as appointed brokers to ensure compliance with the provisions. The stock exchange will monitor their compliance and in case of any instance of such non-compliance will impose appropriate fines or other enforcement actions as deem fit.

Currently, for share buyback, companies have both the options of stock exchange and tender offer.

With regards to margin requirements for deposits in an escrow account, Sebi said that the escrow account should consist of cash and/or other than cash. The portion of the escrow account in the form of other than the cash will be subject to an appropriate haircut.

Sebi said that the merchant banker to the buyback offer have to ensure that the adequate amount after the applicable haircut is available in an escrow account till the completion of all formalities of the buyback.

In February, the regulator amended buyback of securities rules to streamline the process of buyback, create a level playing field for investors and promote ease of doing business.

Under the rules, the buyback of shares by companies through the stock exchange route would be phased out, a move that will address the drawbacks associated with the existing mechanism.

Further, the companies would have to utilise 75 per cent of the proceeds of the buyback undertaken through the stock exchange route from the existing minimum of 50 per cent.

Also, buybacks will be undertaken through a separate window on stock exchanges till the time they are permitted through the exchanges.

Since shares are bought back at the prevailing market price, acceptance of shares under buyback is a matter of chance for most shareholders. There is no clarity as to whether shares are accepted under buyback or sold in the open market and thus shareholders are unable to claim the benefits arising out of buybacks.

The amended buyback rules would come into force from March 9, the Securities and Exchange Board of India (Sebi) said.