SEBI allows promoters to buy more to improve market sentiment

With the market plummeting each day and hammering investor sentiment, the Securities and Exchange Board of India...

With the market plummeting each day and hammering investor sentiment, the Securities and Exchange Board of India (SEBI) has relaxed the creeping acquisition route, giving more flexibility to promoters to increase equity stakes in their companies. This is meant to help promoters acquire shares of their companies from the market, hold price levels and improve marker sentiment.

SEBI stepped in after the benchmark Sensex — which plunged over 1000 points (11.5 per cent) at one stage to fall below the 8,000 level for the first time in three years — staged a dramatic 800-point intra-day recovery on Monday. The index finally closed with a loss of 192 points, or 2.2 per cent, at 8,509.56. However, other global markets like Tokyo, Hong Kong and London fell between 5-12 per cent.

The SEBI board decided that “henceforth consolidation through creeping acquisition up to 5 per cent per year be allowed to persons holding 55 per cent and above but below 75 per cent, subject to the condition that such acquisition can only be via open market purchases in the normal segment.” However, for the purpose, no consolidation through the bulk, block or the negotiated deal or through preferential allotment would be permitted.

With this change, the creeping acquisition route permits promoters to buy an additional 5 per cent stake each year from the open market, without triggering SEBI’s takeover code.

Further, for any increase in the holding of promoters pursuant to buyback, exemption under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations was required to be sought. “It has now been decided to automatically exempt increase or consolidation up to 5 per cent per annum as a result of buyback by a company,” the regulator said.

“If the promoter comes out and buys his company’s stock, it will improve the confidence of investors in such companies. It will also hold price levels and act as a kind buffer in the current crash course,” said an investment banker. With share prices at very low valuations, many promoters are likely to come forward to buy their stocks.

In many companies like Reliance Industries, Bharti Airtel and Reliance Communications, the promoter holding is between 50-70 per cent level. Now they will be able to hike their holdings without attracting the 20 per cent open offer clause. The Sebi had last year reduced the creeping acquisition limit for promoters from 75 per cent to 55 per cent. Sebi had then said such promoters would have to make the mandatory open offer if they wish to raise their holdings over 55 per cent. Some four years ago, the annual creeping acquisition limit was hiked from 5 per cent to 10 per cent for a brief period. Thereafter, the annual level was brought back to 5 per cent.