The Securities and Exchange Board of India’s decision to phase out share buyback through stock exchanges is good for investors as it will help prevent undue price distortions that normally happen during the offer period. The market regulator is acting on the recommendation of the Keki Mistry committee formed for reviewing buyback regulations. The Mistry committee’s report pointed out that buybacks through the secondary market are not in investors’ interest since the acceptance of shares from investors is not proportionate to their holding, the lengthy buyback periods witness excessive stock price volatility, and investors may not even know whether the shares have been purchased by the company or by someone else.

The regulator is also perhaps worried about some promoters using this route to boost sagging stock prices. SEBI has laid out a glide path to phase out the exchange route wherein the maximum limit for buybacks will be reduced from the current level of 15 per cent of capital and reserves to 0 per cent by April 1, 2025, and the time period for completing the offer will also be similarly reduced. The regulator is also trying to deter promoters by laying down that 75 per cent of funds earmarked for the offer need to be utilised, up from 50 per cent stipulated earlier. A separate window now needs to be opened on stock exchanges for these buybacks, so that there is more transparency.

Although SEBI has decided to close the stock exchange route for buybacks, it has left the tender route open for promoters wishing to repurchase shares from investors. This route is more equitable as the share acceptance ratio ensures that every investor gets the opportunity to tender his/her share to the company. SEBI is also trying to make this route more attractive for investors by reducing the timeline for completion of the offer by 18 days, allowing companies to revise the offer price until one day before the record date and making it mandatory to advertise the buyback offer adequately on the exchanges and company website. The Centre should pay heed to SEBI’s concern over how the rules for taxing share buybacks are harming small shareholders. Making the gains taxable in the hands of the shareholder will ensure that company funds are not misused to pay tax on behalf of promoters. Even promoters of some well-known companies have recently benefited from this tax rule at the expense of the small shareholders.

The SEBI Board has also laid down rules for improving governance at market infrastructure institutions (MIIs) such as stock exchanges, clearing corporations and depositories. Shortcomings of MIIs were exposed in the NSE colocation scam. SEBI’s proposal to divide these institutions into three independent verticals — critical operations; regulatory, compliance and risk management; and other functions — will hopefully lead to greater effectiveness. Similarly, asking exchanges to frame a policy for selection of key managerial personnel and data sharing will help build more credible and robust MIIs in India.