Sebi's proposal revives essence of buyback: Deena Mehta

In an interview to CNBC-TV18, Deena Mehta, managing director,  Asit C Mehta Investments welcomes Sebi's buyback proposal. She says that the tightening is necessary.

"This was something which was often misused by companies by saying that there is a floor price put to the share price. They then say that the share price will not go below that level, because the company is sending it in the market to buy the shares. So, not allowing the share to fall or rise to its own level and putting this kind of floor was a misuse of buyback," she says. Below is an edited transcript of Mehta's interview to CNBC-TV18.

Q: What do you make of the tightening of the buyback rules? Too often companies announce a buyback merely to indicate that they want to support the stock at that level and really do not put their money where their mouth is. Do you think saying that you have to give an upfront money of 25 percent in the escrow account and that you should complete it in three months rather than 12 months is worthwhile?
A: Some form of tightening was necessary. This was something which was often misused by companies by saying that there is a floor price put to the share price. They, then say that the share price will not go below that level, because the company is sending in the market to buy the shares. So, not allowing the share to fall or rise to its own level and putting this kind of floor was a misuse of buyback.
Why a company does a buyback is because what the share price is worth, that price the market is not giving. There is a constant balance between the cost of compliance and the premium that you get in the market. If the cost of compliance is higher than the premium that you get in the market, then it makes sense for a company to do buyback.
There have been some foreign companies who would not want to follow the compliance rules and who really are cash rich, so they do not want to have the listing at all. There have been buybacks and delisting. However, whether two years is too much or not these things have to evolve out of a discussion. Though, some form of a really tight limit was necessary so that you use buyback in the real sense of it. Buyback is used to reduce capital because a company is cash flush and that money is used to get a fair value of the share. When the floating stock shrinks, then prices tend to go higher. This kind of purpose for the buyback needs to be served. However, if that purpose is misused, some tightening is required. This is just a concept paper as of now. People will give their views. It is always in regulators’ interest to give as high things as possible so, that can water down then. If they give six months and one year, then ofcourse there would not be much scope to bring it down. Then it would not be a discussion paper, it would be straight away a regulation by itself. From that point of view, something was needed to be done.
With regards to putting money in escrow, the company which is flushed with cash, only those companies go for buyback. So, putting some money in escrow is okay. One should not feel that because you have to put money where your mouth is. These are put in fixed deposits and if they earn an interest on it, it is okay.
Two years may be very harsh. Two years will not allow them to raise money. However, at the same time, companies do strategic planning for three years- five years, nobody plans for one year and two years. If today one decides to do a buyback, it is a well thought of decision which is a part of the bigger strategy.
If one says that from the date of issuance, two years maybe the actual period would be one and half year.
If one says that from the date of issuance, the actual period would be one and a half year, then, something like that in between can be worked out. However, I think three years to five years time horizon is what people use for the purpose of strategic planning. Two years should not be very harsh in my opinion.