Prefer tender method to make buybacks meaningful: Haldea

In an interview to CNBC-TV18, Prithvi Haldea, CMD, Prime Database spoke about the new buy back norms and Chandrasekhar Committee's recommendations that Securities and Exchange Board of India (Sebi) approved on Tuesday.

Below is the verbatim transcript of his interview on CNBC-TV18. Q: Do you think the safeguards put on buyback like reducing time limit and forcing minimum 50 percent of amount set aside for buyback to be used up will be enough to stop the rampant misuse of buyback that we have seen? A: These new guidelines are in recognition of the fact that the buyback guidelines for the stock exchange mechanism have been grossly misused over the years. Initially, there was no mandate on the amount of buyback that was required and therefore, companies would announce very high buyback price, not buy single share for the whole year and give wrong signal to the investors. Then we came up with these guidelines which were changed couple of years ago and now we have made them more stringent. So this is recognition of the fact that stock exchange mechanism is not a very good mechanism, open to misuse, and all you are doing is to increase the threshold here and there. Like an IPO when you issue capital, you do it over a three-five day period and get done with it. We should follow an identical method for reverse capital. We should allow only the tenders method where you are telling the existing shareholders that the company has extra reserves which it wants to use to buyback capital. Therefore, people who do not think that there is future with this company can exit by tendering the shares at a higher price than the market price otherwise why anyone will come to the company. So, we should not allow the stock exchange mechanism which has been used to give wrong signals to the investors and to the market place and revert only to the tender method where you decide a premium to the current market price, 10-20 percent, open a small window of 10-15 days. Shareholders who want to exit will exit at a price otherwise they will hold on. But I am happy that the measures are more stringent than before because I just pulled out the data of the last 15-16 months and found that every third issue mobilised less than one third of its intended buyback amount. So 14 out of 43 companies bought back less than 30 percent of the intended buyback, this included some of the largest buyback announcements like Reliance industries and Reliance Infrastructure that ended up with 25-30 percent. The purpose of buyback is to give an exit opportunity to those shareholders who do not want to stay with the company, to be able to buyback these shares by using the premium, the reserves that you have and therefore, the methodology for this should be simple. Q: Securities and Exchange Board of India (Sebi) has endorsed the Chandrasekhar Committee’s recommendations that qualified foreign investors (QFIs) should be merged with foreign institutional investors (FIIs) and FII subaccounts and the whole category should be called foreign portfolio investments (FPIs). Will this make a big difference to FII’s approach to India? A: I am in agreement with the classification. The biggest new paradigm that has been brought about is that you don’t have to register with Sebi to be able to enter the Indian market. Like a domestic investor has to register himself only with the depository and not with Sebi, similarly foreign investors will not have to first register with Sebi which could be a long and tedious process. All you have to do is to identify one of the designated depository participants and register with them and you'll be allowed to invest in India. So that is one major change which has come about of registration process of how to enter India. Second, instead of having stringent uniform know your customer (KYC) guidelines across all classes of investors, Sebi has recognised that there are government funds, sovereign funds which require much less KYC. There are institutional investors like pension funds and mutual funds, then there are individuals and small players who require a much more stringent KYC. So, the classification is very appropriate and the degree of KYC required across these three bodies will depend upon the final KYC guidelines. But the recognition that these require different KYCs is a very welcome thought. Q: What is the point in merging qualified financial investors into the same category as FIIs if the tax treatment is going to be different? Do you see them getting the same tax treatment? A: You are absolutely right. These are broad indicators of the thinking. When we get down to the fine print with regards to entry, exit, taxation, there could be some issues. The government is very keen right now as it appears to attract foreign inflows into the country in the portfolio scheme and this step will streamline and simplify at least the entry. The bigger question remains that there should be good investment opportunities in India and the economy and the polity of the country has to improve but that these guidelines cannot help. Q: Sebi has introduced some rules on preferential allotment as well. Promoters have to pay with their own bank accounts and disclose the ultimate beneficial owner. Are these substantive improvements? A: No substantive only in the first point which is that if you are an investor then money should come from your account. It cannot come from a third account therefore; we should be able to establish if necessary the audit trail. So, preferential issue in any case is a preferential treatment given in capital allocation.