Capital market regulator Sebi has tightened rules for share buybacks by mandating companies to purchase at least 50% of the offer size, failing which they will have to forfeit 2.5% of the total amount earmarked. 

The Sebi board which met on Tuesday cleared the new buyback norms along with a slew of other market-friendly measures. It has also approved an overhaul of rules for overseas investors following recommendations of a panel headed by a former cabinet secretary. 

In a move aimed to ensure a higher capital commitment from companies, the regulator has made it mandatory for them to put 25% of the amount earmarked for buyback in an escrow account and to complete their share purchase offer within six months from the current 12-month period. 

The regulator had observed that some companies never buy a single share despite keeping the buyback offer open for an entire year. 

"The regulator's decision to revise the buyback guidelines comes from the hard pressed need to regulate the pricing, quantity and the periodicity aspects of the buyback offers in past," said Hemal Uchat, executive director, PwC India 

"It is expected that regulator may clarify whether the transfer to escrow account will be over and above the buyback amount in case of the open market process as well as the consequences of not achieving even the minimum required 50% of the offer size. The revised guidelines are also tilted towards encouraging companies to undertake the buyback offer through tender offer process as against the existing popular method of open market process," Uchat said.

Sebi has also barred promoters from executing any transaction either on-market or off-market during the buyback period. Besides, companies would not be able to raise further capital for one year from the closure of the buyback or make another buyback offer within a period of one year from the date of closure of the preceding offer. 

Rules allow companies to do share purchases through tender offer as well as open market purchase. Sebi said companies should buyback 15% or more of capital only by way of tender offer which is similar to a book-building process. 

"The new changes are in the positive direction with more clarity and focus. Henceforth, only companies which are serious could go for buybacks to support the share prices," said Avinash Gupta, leader, financial advisory & senior director, Deloitte. He added that the changes won't make a big difference in the current market scenario as most companies, reeling under heavy debt, are unlikely to go for share buybacks. 

The Sebi board has also approved easing of entry rules for offshore portfolio investors in an attempt to attract more foreign capital into the country at a time of currency weakness and worries over a record high current account deficit. 

Foreign investors will now be allowed to trade in Indian stocks without any prior registration with Sebi. It has also clubbed different categories of investors like foreign institutional investors, sub-accounts (or an investment vehicle) and qualified foreign investors under a new category called foreign portfolio investor (or FPI). 

"While accepting the recommendations of the committee, the board decided that the recommendations concerning Sebi would be implemented by Sebi and it would refer the other recommendations to the government of India for implementation," the regulator said in a statement. 

The Sebi board has also approved changes to alternative investment fund (AIF) regulations by adding a new sub-category -- Angel Funds -- under the venture capital funds. These funds must have a corpus of at least 10 crore as against 20 crore for other AIFs and minimum investment by an investor should be 25 lakh as against 1 crore. 

In order to ensure that investments are genuine, angel funds can invest only in unlisted companies not older than 3 years and have a turnover not exceeding 25 crore. Besides, the investee companies should not be promoted or related to industrial groups having a turnover of more than 300 crore. 

The regulator has also allowed small and medium enterprises (SMEs) and start-up companies to be listed on the SME platform without making an initial public offer. Sebi said lack of exit opportunities for existing investors and restricted access to new investors are the problems faced by start-ups and SMEs. The move is aimed at giving easier exit options to informed investors like angel investors and private equity funds, better visibility, wider investor base and greater fund raising capabilities to such companies. (Economic Times)