Share buyback via exchange route/Open Market to be phased out - SEBI

I always thought Open market buyback was better option than the tender option as the company had the time to buy back the shares at the lowest level possible (max shares could be bought back) But it seem there are too many loopholes in this option.

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Exactly. Ever since dividends were made taxable in the hands of the receiver, I have seen the tender route to buyback just as a tax efficient way of dividend distribution, and not really a buyback (unless the promoters decide not to participate).
For this reason, when I first saw this news, I just assumed that the tender route to buyback is being deprecated. And now I’m also surprised to know that it’s the other way around. Honestly, I can’t understand the ’favouritism’ concerns mentioned in the article.

Curious to learn which loopholes are being plugged here. @nithin - your views?

Saw the Chairperson interview, Time stamp 4.34. The lady says, the tender route is more equitable and all other options are vulnerable to favoritism, nobody seems to know except the few as to when the company is actually doing the buy back (due to time range) and this may result in favoritism.

Makes sense, as I also learnt that even in buyback through open market operations, there is no tax in case the sell transaction that a customer does is bought in by the company for the buy back purpose.

A very eloquent Chairperson, willing to listen and take in ideas, quite impressed.

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Interesting find… TIL
It also raises more questions in terms of timing the buyback and favoritism.

The lady says in our market “Compliance with the letter of the law and not compliance with the spirit of the law” happens

Time stamp: 35:36 from the video

Hi @abcd5662

Although the FM announced Tax on Buyback in 2019 Union budget, it did not fully plug the loopholes associated with Buybacks.

Companies later started using Buyback as a tool for the following reasons:

  • As there is no tax applicable to the seller, There has been a possibility of companies gaming the system by timing the buyback and potentially benefiting a few individuals as only a handful of people will know when to buy the shares and not all shareholders get equal chance to sell their shares.

  • by announcing a higher amount to be utilized for buying back shares at a higher price but eventually, utilizing a 25% lesser amount by buying shares at 20% lower price as compared to the highest buyback price. As per research conducted by PRIME database for 178 buybacks from 2010.

Source : Investors disappointed as 'open market' share buybacks lack punch | Business Standard News

  • With buyback period continuing for 6 months, There was scope for companies to artificially create demand for an extended period.

SEBI has tackled these points by

  • Changing Buyback period to 66 days in 2023 from 90 and eventually 22 working days

  • Companies will now have to utilize 75% of the proceeds for buyback going forward (from 50%) and this shall be done through a separate trading window till the time buyback through stock exchanges is permitted.

PS : From FY 16-17 till FY19, Annually, Buybacks by companies were 10 times more (47K Crore) compared to sub 4k crore per year in previous 10 years. This was primarily done to avoid taxes as there was no tax on buyback and there were taxes at multiple levels when it came to dividend . That loophole got fixed in the 2019 union budget as the FM announced 20% Tax on Buyback.

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Thanks for the detailed reply.
But my question is more of - is tender route superior to the open market route?
Isn’t tender route just a dividend distribution mechanism, and that too a bad one as unaware retail investors who do not tender shares miss out on the bonanza. On the other hand, open market buyback leads to increased promoter shareholding, and hence a better indicator of good health?

I did not understand this. Is there no taxation on all sellers during the buyback period or just in case of sellers where the sold shares were accepted by the company during buyback? In case of former, there’s a similar challenge with tender buybacks and in case of the latter, how is a seller supposed to know if the shares were sold against the buyback order?

Phasing out isn’t the way to deal with this, right? The min 50% rule (now 75% I guess) can be kept at a even higher fraction. In fact I have always used the metric to evaluate companies. I.e. if a company is still buying back shares after reaching the 50% mark, it just signifies that they consider the cmp to be still undervaluing them.

Again, don’t see as a loophole. For illiquid stocks, the price very early crosses the max bb price with buyback orders, so the demand can’t be artificially maintained.

Isn’t there still an arbitrage? Dividends are taxed at marginal tax rates (>30% for any potential exploiters of loopholes) vs whatever is it on buyback (am not very sure if it is at stcg/ltcg or 20% or tax-free as you have mentioned at the top)?
In fact, the data that should be looked upon is- how has the break-up b/w no. of companies going for open market vs tender route buyback changed over time - if the hypothesis is that open market buybacks have loopholes.

The reason I am curious on the topic is that I have personally liked the new sebi chairperson’s thought process around her work, from whatever little I have understood from her interviews/ press conferences. But this time, the narrative seemed to be counter intuitive (obviously I am missing out something here). And also because buyback is one of the few corporate actions I follow closely, and from my sample set of companies I’ve tracked over the last 3 yrs, companies coming up with open market buybacks have performed better (in terms of long term price performance) vs ones with tender route - may be because of the above shared hypotheses.

Open market is far superior to the existing shareholders of the company than Tender route by any count. When TCS last year or so, came out with a Tender Buyback, there were many new investors who bought the share only to make use of the price advantage and exit. As an existing shareholder, holding on to the shares for many years, the allocation I got was NIL.

Why is this being faced out - SEBI chairperson very clearly says, that Corporates misuse this option. It is only for this reason the Open market route is being phased out. I would have preferred SEBI strengthening the regulation on Open market route. But then I think from SEBI perspective, majority of the listed entities must be misusing this and there could be only a handful of companies who will be doing the right thing, hence stopping this option once and for all.

Yes, but with tax advantage to the seller.

Nil Taxation is only on those tranche which the company has bought. How will the seller know, well, I read in another post from @shubhs that the company when they do such buy back will send an email to the seller that this tranche which the seller sold and bought by the company was under the buy back scheme and hence will be eligible for tax exemption. (I could be wrong but this is what I understood)

Agree - I would have preferred, SEBI to plug the loop holes than scrap this option.

There is no loophole for well managed corporates, might not be the case for unscrupulus promoters. Saurabh Mukerjea of Marcellus states that there are only handful of Corporates who are clean in the listed space. SEBI will be knowing better as they might be having oversight on the entire Corporates who are listed.

Disc: Just took the liberty to reply what I know. Could be wrong.