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MUMBAI: Various listed companies have sought clarity from the Securities and Exchange Board of India (Sebi) on whether shares held in physical form could be accepted for buybacks, said two people privy to the development.
The development comes after the National Stock Exchange (NSE) in a circular last month asked companies to accept only dematerialised shares for buybacks.
This prompted companies such as Quick Heal Technologies, Aarti Drugs, Zenith Fibers to include similar clause in their buyback offer document.
Sebi had banned investors from transferring any shares in physical form with effect from April 1, 2019.
Lawyers said this constraint should not apply to buybacks as they do not qualify as transfer of securities since ownership of the shares doesn’t change.
“The idea of Sebi was to track the changes in the ownership of these shares and such a challenge doesn’t exist in buybacks since there is no ownership change and shares purchased back by the company are extinguished,” said Anil Choudhary, partner, Finsec Law Advisors.
The uncertainty will impact thousands of investors who continue to own physical shares.
While the official number of such shareholders is not available, market sources estimate the total value of physical shares at over 50,000 crore.
For instance, there are about 8 crore physical shares worth over 10,000 crore of Reliance Industries and about 374 crore shares in ITC worth 10,500 crore, data from the stock exchanges showed.
Other leading blue chips where investors hold physical shares include HDFC Bank, Wipro and Infosys.
“The issue has far reaching impact since by this logic physical shareholders will not be able to participate even in de-listing processes and hence would not be able to get an exit unless they convert their shares,” said a lawyer familiar with the development.
“When the regulator has allowed investors to hold shares in physical form, you cannot force investors to convert their shares into demat.”
In late 2018, Sebi introduced a new law barring investors from holding or transferring physical shares.
However, the new rules were toned down in March 2019, allowing investors to hold physical shares with the condition that they can be transferred only in demat form.
Experts say, buybacks don’t come under the definition of ‘transfer’ specified in Sebi’s listing obligations and disclosure requirements (LODR) norms.
“Buybacks cannot be regarded as transfer of securities and accordingly, the restriction on physical transfers cannot be applied in case of buyback,” said Vinita Nair, partner, Vinod Kothari Company.
“There is an urgent need for Sebi to clarify as this is resulting in listed entities denying the retail shareholders of their basic right.”
The capital markets regulator had brought up restrictions on transfer of physical shares to improve transparency on concerns investors could hold them in this form to hide actual beneficial owner information and to evade taxes.
Lawyers said the different laws of Sebi and the stock exchange on the issue have caused confusion.
“Section 19 of Sebi Buyback regulations which talks about mechanism for buyback of shares in physical form continues to be in effect while NSE has banned such transactions,” said another source cited above.
“While NSE has powers as a frontline regulator to introduce new provisions, they can’t be in conflict with Sebi rules.”
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Can physical shares be accepted in buybacks, companies ask Sebi
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