STOCK EXCHANGE ROUTE 

1. Context 

2. Share buyback

• When a listed company buys its shares from the existing shareholders, it is known as a share buyback, which is also called share repurchase.
• The process reduces the number of outstanding shares in the open market over a period which can lead to better valuation and Earnings Per Share (EPS).
• Currently, a company can buy back its shares from shareholders on a proportionate basis through a tender offer, from the open market via a book-building process or from the odd-lot holders.
• The maximum limit of any buyback is 25 per cent or less of the aggregate of paid-up capital and free reserves of a company.

3. Stock exchange route

• Under the stock exchange route, a company can buy back shares only on the stock exchanges having nationwide trading terminals.
• The buyback of shares is made only through the order-matching mechanism.
• In this method, the promoters or persons in control of a company are not allowed to participate.
• Paytm, which witnessed a 76 per cent crash in share prices after its IPO last year, recently decided to opt for the open market route through the stock exchanges method for share buyback, which is to be completed within a maximum period of 6 months.
• While TCS, which came out with share buybacks recently, used the tender route, Infosys opted for the stock exchange method for its recent buyback.

4. SEBI opposing the exchange route 

• As per the recommendations of the Keki Mistry-headed committee, set up by Sebi to review the buyback regulations, under the stock exchange route, there is a possibility of one shareholder's entire trade getting matched with the purchase order placed by the company, thus depriving other shareholders of availing the benefit of buyback.
• This runs contrary to the principle of equitable treatment, which forms the basis of all corporate actions.
• The tender route is the more equitable route for buybacks.

5. Phased out of exchange route

• As recommended by the Keki Mistry Committee, Sebi will phase out buyback through the stock exchange route with effect from April 1, 2025. 
• Many experts termed Sebi's decision to phase out stock buyback through the exchange route as positive as it will allow all the shareholders to participate.
• This move aims to make the buyback process more robust, efficient, transparent and shareholder-friendly.

6. Benefit to shareholders

• The entire process of buyback via stock markets may or may not have benefitted smaller investors as they may not have known when the buyback was taking place.
• With the tender offer process being the only process going forward, all shareholders would now be provided with an opportunity to participate in the buyback.
• Especially as tender offers also require a reservation for small shareholders.
• In a way, it democratises the process and creates a fair and equitable platform.

7. Buyback via a tender offer

• A tender offer means an offer by a company to buy back its shares or other specified securities through a letter of offer from the holders of the shares or other specified securities of the company.
• The buyback is done on a proportionate basis as per the buyback ratio and the additional shares tendered over and above the prescribed buyback ratio get accepted if there are any unaccepted shares. It is a fixed-price buyback offer.

8. Changes in the tender system

• Sebi has reduced the timeline for completion of the buyback through a tender offer by 18 days, by removing the requirement of filling a draft letter of offer with it.
• It also permitted an upward revision of the buyback price until one working day before the record date.
• The process of offering shares under the tender process is similar to buying shares through an online Demat account.
• When the company launches a buyback, shareholders will find an option of "offer for sale" when they log into their Demat account.
• Shareholders who wish to sell their shares can submit them to the Company for sale.
• The price under this mechanism is fixed and is offered higher than the market price to attract a large number of shareholders to sell their shares.
• Fifteen per cent of the buyback size is reserved for small shareholders.
• All shareholders as on the record date are eligible to participate in the process.

For Prelims & Mains