Chapter 8: Other Merchant Banking Activities - Disinvestment, Buyback of Equity Shares

Disinvestment refers to the dilution or sale of equity share capital, voting rights, or control held by the Central Government, State Governments, or public sector enterprises in Public Sector Undertakings (PSUs). Disinvestment policy is administered by the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance.

Disinvestment Methodologies and Market Structures

PSU DISINVESTMENT MODALITIES

Role of Merchant Bankers as Transaction Advisors in Disinvestments

• Mandated Transaction Advisor: The Government selects SEBI-registered Merchant Bankers through competitive bidding to manage disinvestment transactions.
• Scope of Responsibilities:
  • Assisting DIPAM and the administrative ministry in transaction structuring, capital restructuring, and balance-sheet readiness.
  • Comprehensive valuation of PSU assets, business operations, and intellectual property.
  • Preparing Preliminary Information Memorandums (PIMs), conducting international investor roadshows, managing bidding processes, and drafting transaction agreements (Share Purchase Agreements, Shareholders' Agreements).
  • Ensuring compliance with SEBI ICDR, SAST, and LODR Regulations, Department of Public Enterprises (DPE) guidelines, and Central Vigilance Commission (CVC) governance norms.

A share buyback represents a capital reduction process through which a company repurchases its own outstanding equity shares from shareholders, returning surplus capital, optimizing capital structure, and boosting Return on Equity (ROE) and Earnings Per Share (EPS). Share repurchases are governed by the SEBI (Buy-Back of Securities) Regulations, 2018 and Section 68 of the Companies Act, 2013.

Statutory Ceilings and Financial Limits

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|                                BUYBACK STATUTORY FINANCIAL CEILINGS                               |
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|                                                                                                   |
|  • BOARD APPROVAL ROUTE    : Buyback up to 10% of total paid-up equity capital and free reserves. |
|  • SPECIAL RESOLUTION ROUTE: Buyback up to 25% of total paid-up equity capital and free reserves. |
|  • NUMBER OF SHARES LIMIT  : In any financial year, buyback cannot exceed 25% of total paid-up    |
|                              equity share capital.                                                |
|  • POST-BUYBACK DEBT RATIO : Aggregate debt cannot exceed TWICE paid-up capital and free reserves |
|                              (Debt-to-Equity ratio <= 2:1).                                       |
|  • COOLING-OFF PERIOD      : A full 1-YEAR COOLING-OFF PERIOD must elapse between two buybacks.   |
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Tender Offer Route and Small Shareholder Quota

• Under Regulation 4, the Tender Offer Route on stock exchanges provides proportional participation across all shareholders.
• 15% Reservation for Small Shareholders:
  • The issuer must reserve at least 15% of the total number of shares proposed to be bought back (or the number of shares held by small shareholders, whichever is less) exclusively for Small Shareholders.
  • A small shareholder is defined as an individual holding equity shares having a total market value of not more than INR 2,00,000 as on the Record Date.

Escrow Obligations and Extinguishment of Shares

• Escrow Account Requirement (Regulation 9):
  • Prior to opening the buyback offer, the issuer must open an Escrow Account managed by the Merchant Banker:
    • 25% of the consideration payable for amounts up to INR 100 Crores.
    • 10% of the balance consideration for amounts exceeding INR 100 Crores.
• Extinguishment and Destruction of Shares (Regulation 11):
  • All equity shares repurchased in a buyback must be extinguished and physically destroyed / debited from depository registers within seven working days of the completion of the buyback.

Detailed Step-by-Step Buyback Process through Tender Offer

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|                               BUYBACK TENDER OFFER STATUTORY MILESTONES                           |
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|                                                                                                   |
|  1. BOARD / SHAREHOLDER APPROVAL: Pass resolution authorizing buyback and approve maximum price.  |
|  2. PUBLIC ANNOUNCEMENT (PA)   : Dispatched within 2 WORKING DAYS of resolution to SEBI and       |
|                                  Stock Exchanges; published in national newspapers.               |
|  3. RECORD DATE DETERMINATION  : Fixed to determine eligible shareholders and small shareholder   |
|                                  entitlement ratios.                                              |
|  4. DRAFT LETTER OF OFFER (DLOF): Filed with SEBI within 5 WORKING DAYS of PA along with fees.     |
|  5. ESCROW ACCOUNT OPENING     : 25% of consideration up to INR 100 Cr + 10% balance deposited.  |
|  6. DISPATCH LETTER OF OFFER   : Dispatched within 5 WORKING DAYS of receipt of SEBI comments.   |
|  7. TENDERING PERIOD           : Open for 5 WORKING DAYS on stock exchange electronic window.     |
|  8. PAYMENT & SETTLEMENT       : Complete payment to shareholders within 5 WORKING DAYS of close. |
|  9. EXTINGUISHMENT OF SHARES   : Shares extinguished and destroyed within 7 WORKING DAYS.         |
| 10. POST-BUYBACK REPORT        : Merchant Banker files final compliance report within 20 days.    |
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Prohibitions and Restrictions during Buyback

Under Regulation 24 of the SEBI Buy-back Regulations:

• The company cannot issue any new shares (including by way of bonus shares or preferential allotment) from the date of passing the buyback resolution until the date of closure of the buyback offer.
• The company cannot raise further capital for a period of one year from the closure of the buyback (except in discharge of subsisting obligations like convertible debentures, warrants, or stock options).
• Promoters and persons in control are prohibited from dealing in the company's equity shares on the stock exchange or off-market during the buyback period.

Delisting of equity shares refers to the permanent removal of a company's securities from trading on recognized stock exchanges under the SEBI (Delisting of Equity Shares) Regulations, 2021.

Voluntary Delisting via Reverse Book Building (RBB)

REVERSE BOOK BUILDING DELISTING FLOW

• The 90% Threshold for Delisting Success:
  • A voluntary delisting offer succeeds if, and only if, the post-offer shareholding of the acquirer (along with PAC) reaches at least 90% of the total issued equity share capital of the company.
• Discovered Price Determination:
  • Public shareholders tender shares through an electronic order book at their chosen exit price (at or above the Floor Price).
  • The Discovered Price is the price at which the cumulative shares tendered take the acquirer's total holding to the mandatory 90% threshold.
• Counter-Offer Mechanism:
  • If the discovered price is higher than the acquirer is willing to pay, the acquirer may issue a Counter-Offer (which cannot be lower than the book value of the company). Public shareholders can accept or decline the counter-offer.
• Post-Delisting 1-Year Exit Facility:
  • Following a successful delisting, remaining public shareholders who chose not to tender have the right to tender their shares to the acquirer at the final exit price for a minimum period of one year from the date of delisting.

The issuance and listing of corporate debt securities are governed by the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). Merchant bankers manage both public issues of debt and private placements on electronic platforms.

Public Issue of Debt Securities

• Mandatory Prerequisites:
  • Credit rating from at least one SEBI-registered Credit Rating Agency (CRA).
  • Appointment of an independent SEBI-registered Debenture Trustee and execution of a Debenture Trust Deed creating a charge over assets.
  • Minimum subscription of 75% of the base issue size.
  • Establishment of a Recovery Expense Fund (REF) of 0.01% of the issue size deposited with the designated stock exchange to finance enforcement actions in default.

Private Placement on Electronic Book Provider (EBP) Platform

• For private placements of debt securities exceeding INR 50 Crores (or smaller issuances by frequent issuers), bidding must be executed through the recognized stock exchange Electronic Book Provider (EBP) platform.
• The EBP platform provides transparent order matching, price discovery, and bidding verification across eligible institutional investors.

Merchant bankers provide statutory certifications and advisory support across specialized corporate schemes and investor protection mandates.

1. SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

Covers five employee benefit scheme structures:

1. Employee Stock Option Schemes (ESOS): Right to purchase shares at a pre-determined exercise price after a minimum 1-year vesting period.
2. Employee Stock Purchase Schemes (ESPS): Direct subscription to shares as part of public offering or private corporate schemes.
3. Stock Appreciation Rights Schemes (SARS): Entitles employees to cash or shares equal to stock price appreciation over a defined benchmark.
4. General Employee Benefits Schemes (GEBS) and Retirement Benefit Schemes (RBS).

• Merchant Banker Certification: A registered Merchant Banker must submit a formal statutory certificate to the Annual General Meeting (AGM) certifying that the company's employee benefit schemes comply with SEBI regulations and shareholder approvals.

2. Exit Opportunity to Dissenting Shareholders

• Governed by Section 13(8) and Section 27 of the Companies Act, 2013 and Chapter VI-A of the ICDR Regulations.
• Triggering Event: When a listed company that raised capital from the public has unutilized issue proceeds and proposes to alter the stated objects of the issue or change its core business, it must pass a Special Resolution.
• Mandatory Exit Offer: Promoters must provide dissenting shareholders (who voted against the resolution) with an exit opportunity to sell their shares at an independently determined fair price managed by a SEBI-registered Merchant Banker.

To foster capital access for small and medium-sized enterprises and alternative asset classes, SEBI established dedicated regulatory regimes for SME exchanges, REITs, and InvITs.

SME Exchange Platform (Chapter IX of ICDR Regulations)

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|                                  SME PLATFORM STATUTORY BLUEPRINT                                 |
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|                                                                                                   |
|  • CAPITAL CEILING         : Post-issue face value capital must NOT EXCEED INR 25 CRORES.         |
|  • 100% UNDERWRITING       : The public issue must be 100% UNDERWRITTEN.                          |
|  • MERCHANT BANKER COMMIT  : Lead Merchant Banker must underwrite at least 15% ON OWN ACCOUNT.   |
|  • MINIMUM APPLICATION SIZE: Minimum application ticket size is INR 1,00,000 (INR 1 Lakh).        |
|  • ALLOTTEE THRESHOLD      : Minimum 50 allottees required for successful completion.             |
|  • MIGRATION TO MAIN BOARD : Permitted when paid-up capital exceeds INR 10 Crores and up to       |
|                              INR 25 Crores, subject to 2/3rd non-promoter shareholder approval.   |
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Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)

• Under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014, Merchant Bankers act as lead managers for public unit offerings.
• Lead managers conduct comprehensive asset due diligence on underlying Special Purpose Vehicles (SPVs), review concession agreements and revenue streams, verify property titles, and ensure mandatory distribution of at least 90% of Net Distributable Cash Flows (NDCF) to unitholders.

Detailed SME Platform Listing Prerequisites & Governance

• Incorporation and Operational Track Record:
  • The SME applicant must have a track record of operations of at least three years.
  • The company must have positive operating profit (EBITDA) in at least two out of the preceding three financial years.
  • The net worth of the company must be positive in the immediately preceding financial year.
• Continuous Compliance Requirements for SME Listed Entities:
  • Half-yearly financial reporting (instead of quarterly reporting required for main-board companies).
  • Market Making: The Lead Merchant Banker must arrange for compulsory Market Making for a minimum period of three years from the date of listing, providing continuous two-way bid-ask quotes to ensure liquidity.
• Migration Mechanism from SME Exchange to Main Board:
  • An SME listed company whose post-issue paid-up face value capital exceeds INR 10 Crores and is up to INR 25 Crores can migrate to the Main Board of NSE or BSE.
  • Prerequisites for Migration: The company must have been listed on the SME exchange for at least two years, and the migration proposal must be approved by at least two-thirds of the public shareholders (non-promoters) voting on the special resolution.