Buyback of Shares - A Tool For The Companies To Come Out Of Crisis Situations?

SECTION 77 restricts the buyback of own shares from the market by the company or its subsidiaries/parent company. This restriction was imposed on the companies to ensure that these companies do not indulge in unfair and mal trade practices by unnecessarily blowing up their share prices in the market and misleading the investors by giving the misconception that their shares are doing well in the market by adopting techniques of speculation. Thus, the restriction imposed by the concerned section was fairly reasoned by the law making authorities in the interest of the investors and as per the guidelines of SEBI for investor protection. 

Later on, there felt a need to relax these restrictions imposed on the companies as it even restricted the companies i.e the sick units from adopting their last resort of rescue on reconstruction to do away with their immense liabilities and improvise their market conditions in order to sustain competition and survive the same. So Sec.77A came up from the law making body as a rescue to these sick units. But, the new section which sort to provide relief to these units had many loopholes in it in spite of the list of regulations announced along with the new section to prevent any unfair advantage taken of the relief provided through sec.77A. as had thought of previously.  The companies announced large buybacks at a lucratively high price generally a price higher than the current market price of those shares.

This led to a misconception to the investors that the shares in the market are under priced and thus the new price at which the shares were announced to be bought back became the base price below which no investor was ready to sell of his share to the other. Thus the companies by announcing a high buyback price for shares had succeeded in making it their market price of shares. After which most of the companies dint abide by their words of buy back and just bought a merge fraction of the amount announced or sometimes even nothing was bought. This practice becomes a very easy tool to boost up your market prices in the market and earning goodwill too with practically zero investment or costing. It is being commonly practiced without being much noticed neither is it acted against by the officials as they are well within the regulations issued under the section. It is called HOLLOW BUYBACK OF SHARES.

SEBI has noticed this being practiced in the stock markets and thus has issued certain minimum limitation on amount of buyback to ensure that the company actually carries out the buyback announced but it does not ensure the completion of the entire amount announced. Moreover this minimum limitation is also not made mandatory yet it is just an informal guideline suggested by SEBI and can be made mandatory only once the section is amended.

There is an alarming need for the section to be amended to the soonest so that the companies do not resort to such practices any further. Just a Consumer and Investor Protection Fund (sec.205C)  will not resolve all problems and secure the interests of the investors it  requires thorough scanning of the law to detect and rectify the loopholes as the one highlighted in the above article to protect all the investors which is the basic need in stock markets currently after the advent of FDI in the nation to make the foreign investors feel secure in the Indian market.