The Securities and Exchange Board of India (Sebi) on Tuesday notified new buyback rules, which, experts said, are more small investor-friendly and stringent on companies.

In an eight-page notification, Sebi asked companies to reserve 15 per cent of the shares to be bought back for small investors, or those who hold shares worth less than Rs 2 lakh.

“Sebi’s intention is very clear. The regulator wants small investors to benefit from share buybacks rather than large institutional investors,” Siddharth Shah, partner at international law and corporate advisory firm Nishith Desai Associates, told Financial Chronicle. “Sebi wants more small investors to participate in share buyback programmes.”

According to Sebi, shares to be bought back should be divided into two categories; one for small shareholders and the other for other shareholders, and entitlements of shareholders in each category would be calculated accordingly.

“After accepting the shares or other specified securities tendered on the basis of entitlement, shares or other specified securities left to be bought back, if any, in one category shall first be accepted, in proportion to the shares or other specified securities tendered over and above their entitlement in the offer by the security holders in that category and, thereafter, from security holders who have tendered shares over and above their entitlement in the other category,” the Sebi notification said.

The new rules have come into effect from Tuesday. The high-profile $2.1 billion Reliance Industries share buyback offer, which is on at present, will not fall under the new rules.

Shah of Nishith Desai felt Sebi was trying to create separate categories similar to the IPO bidding process, where 35 per cent of shares are reserved exclusively for small investors.

The new buyback rules may be applicable to only ‘off-market’ share buybacks as companies are not in a position to know the identity of sellers in share buyback done through stock exchanges, Shah said.

Sebi also brought down the time frame for share buyback to 10 working days. Under the earlier regime, companies could keep a buyback offer open for up to one year or till such time they manage to mop up the proposed number of shares.

The date of opening a buyback offer shall not be less than five working days from the date of dispatch of the letter of offer.

Sebi said a company should make a public announcement on share buyback within two working days from the date of passing of the resolution by the board of directors or authorisation done through a special resolution.

The Sebi board, the notification said, may give its comments on the draft buyback offer letter not later than seven working days from the receipt of the same. If the Sebi board specifies any changes, the merchant banker to the buyback offer and the company should carry out such changes in the offer letter before it is dispatched to shareholders.

Another interesting feature of the new buyback regime is related to the payment schedule. Sebi said the company must complete verification of the offers received and make payment of the consideration to those security holders whose offers have been accepted or return the shares or other specified securities to the security holders within seven working days from the closure of the offer.

Other disclosures to be made by companies during a share buyback include the necessity of the share buyback, the maximum amount required under the buyback and its percentage of the total paid-up capital and free reserves, maximum price at which shares or other specified securities are proposed to be bought back and the basis for arriving at the buyback price, the method to be adopted for buyback and the aggregate shareholding of the promoter and directors, where the promoter is a company and/or persons who are in control of the company on the date of the notice convening the general meeting or the meeting of the board of directors.