Buyback of Shares by MNCs in India

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Themes: Financial Markets
Period : 1997 - 2002
Organization : SEBI
Pub Date : 2002
Countries : India
Industry : Financial Services

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Case Code : FINC018
Case Length : 12 Pages
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The Buyback Act Contd...

The buyback of shares was allowed only if the Articles of Association¹² of the company permitted it to do so. The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders' approval for the buyback. In addition, companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buyback, except by way of bonus issues and conversion of warrants, preference shares or debentures.

The ordinance did not lead to increased buyback activity by multinational companies. In the financial year 1999-2000, only six MNCs came out with buyback offers, and in the year 2000-2001, only eight more companies offered to buyback shares. According to the analysts, the low level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback regulations were very elaborate and discouraged companies from making use of buyback option (Refer Exhibit I for the buyback process and Exhibit II for methods of buyback). The lack of interest in the buyback option could also be the result of SEBI's restrictive regulations.

Some companies complained that the process of buyback was delayed because the law required them to obtain shareholder approval for offering a buyback. SEBI guidelines prevented companies from raising fresh equity to finance their projects. It also prohibited any subsequent buyback offer by the same company once it had made one for a period of two years. These complaints and the need to revive the stock markets after the September 11, 2001 terrorists' attacks in the US forced the government to make amendments to the buyback ordinance.

The government made amendments to the buyback ordinance in October 2001, relaxing the buyback norms. The new amendments allowed the promoters of a multinational company to make an open offer to purchase up to 10% of its equity without making a public announcement. This purchase just required a mere approval from the board of directors. However, a public announcement and shareholder approval were necessary for any offer above 10%. The amendments also reduced the time limit for issuing fresh shares from 24 months to 6 months. These two changes were incorporated into the buyback ordinance, which was passed by the government in December 2001 (and subsequently became the Buyback Act). The amendments in the buyback ordinance coupled with depressed stock market conditions saw an increase in buyback activity. MNCs (through the open offer route) regarded the buyback option as an opportunity to raise their equity stake in their Indian ventures.

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12] The Articles of Association contain the rules and regulations for the management of the internal affairs of a company.