On its part, Sebi has hiked the creeping acquisition limit from 2 per cent to 5 per cent and the open offer will be required to be made on acquisition of 15 per cent of capital or voting rights and not 10 per cent as is the case now.

Consider the impact of these revisions of regulations. One, the time-frame within which payment has to be made for creeping acquisition has not been specified. Second, the term used continues to be "per cent of votingrights". Assuming that an entity has 25 per cent stake in the equity of the company. As per the regulations acquisition of up to 5 per cent voting rights will be treated as creeping acquisition. Simply stated, the stake can go up to 30 per cent as voting right is calculated in proportion to fully paid-up capital. The term used should be "percentage points" linking the hike in stake to the percentage stake held and not total voting rights.It is also hard to understand as to why, with buyback being allowed and creeping acquisition limit being hiked, resulting in adequate protection (over and above preferential allotment) to the management, the limit for making the open offer should be hiked.

In an obvious attempt to plug the Sterlite-Alcan imbroglio from occurring again, negotiated acquisitions will be permitted only up to the last date for revising the price. This won't have any impact as the open-market purchase route cannot be plugged. All that an entity willing to hike the stake has to do is to make anopen-market purchase at a higher price.

As regards buyback, in all probability, it will be for extinguishment and not for treasury operations. It will be a boon as a majority of the companies are not able to serve the existing equity (equity here means net worth). It will also provide a good opportunity to use the company's fund to hike the stake of promoters but at least it will be beneficial to non-management shareholders also.

It is logical to believe that guidelines framed by Sebi will reflect provisions of the Companies Bill, 1997(clause 69). In that case, certain points need to be considered. Clause 69 of the Companies Bill, 1997 provides that the company may buy back its own shares or other specified securities (employee's stock option or other securities or having such underlying voting rights as may be notified by central government). The company can implement buyback from: (a)free reserves or (b)securities premium account or (c)out of proceeds of any issue made specifically forbuybackConditions: (1)buyback has to be approved by a special resolution (2)The debt-equity ratio, post buyback should not exceed 2:1. The language suggests that debt can be raised to buy back shares. It will certainly be a boon for companies with low debt-equity ratio as their cost of capital will reduce. However, it poses a problem for companies where debt-equity in excess of 2:1 is allowed. The ceiling is probably to protect the interests of creditors. However, the debt-equity ratio norm should be based on the criteria for industry. For example, IPPs can safely go up to 4:1, fertiliser companies can have a ratio of 3:1. Instead of prescribing rigid D/E norm, prior approval of creditors could be made mandatory.

It should be made mandatory that the minimum price at which shares can be bought back should be the higher that the price at which last offer was made or SEBI formula for pricing of preferential offer.

Grey Areas:

(1)buyback is permitted from the proceeds of any issue made specifically for thispurpose. Common sense rules out equity dilution to buy back shares but the management may prefer to issue preference shares to finance buyback. This will only help the existing management to hike its stake because although preference capital is included for calculating net worth(and hence 2:1 debt-equity norm can be maintained), except in specified cases it does not carry voting rights. It may lead to concentration of voting rights.

Secondly, it works out to be costlier than debt (post-tax) as the interest is tax deductible, while the dividend attracts tax at the rate of 10 per cent.

(2)The equity held by group companies could be offered for buyback as the stake can be maintained because of reduction of equity. The group companies as defined in MRTP Act, should not be allowed to participate in buyback.

(3) And most importantly, the period within which the payment for buy-back will have to be made needs to be specified.