Sebi took as many as 102 days to inform L&T’s bankers about its decision, with the sole reason given being the flouting of the debt-equity ratio (Reuters)
Sebi took as many as 102 days to inform L&T’s bankers about its decision, with the sole reason given being the flouting of the debt-equity ratio (Reuters)

L&T’s share buyback ordeal puts spotlight on Sebi’s misplaced zeal

  • Sebi recently rejected Larsen and Toubro Ltd’s (L&T’s) proposal to buy back shares worth 9,000 crore
  • Sebi said the company’s consolidated debt-equity ratio will exceed 2:1 post the buyback, which flouts the regulator’s buyback rules

The Securities and Exchange Board of India (Sebi) has rejected Larsen and Toubro Ltd’s (L&T’s) proposal to buy back shares worth 9,000 crore. The reason cited is that the company’s consolidated debt-equity ratio will exceed 2:1 post the buy-back, which flouts the regulator’s buy-back rules.

Sebi’s ruling gives the impression that it is worried the buyback may result in overleverage, and the company may not have sufficient funds in the case of an exigency.

But one of the workarounds L&T can consider to return cash to shareholders is a special dividend, say analysts. If it ends up choosing that mode, all Sebi would have achieved is push the company away from a more tax-efficient way to return cash. After all, dividend distribution is taxed at multiple levels, which has made buybacks a far more popular means for distributing cash to shareholders.

The other niggling aspect about Sebi’s ruling is that it has considered L&T’s consolidated accounts, whereas its buyback rules state that “the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and free reserves". There is no reference in the rules to consolidated accounts, and the accounts of a company are generally understood to be stand-alone accounts.

This is not to say that consolidated accounts do not matter—especially after the Infrastructure Leasing and Financial Services Ltd fiasco. Even so, to consider consolidated accounts, when the stated rules don’t expressly say so, is poor form.

Graph: Naveen Kumar Saini /Mint
Graph: Naveen Kumar Saini /Mint

A moot question here is if Sebi or the government, which also has its own set of buy-back rules, should micromanage buybacks. If L&T is bent on overleveraging itself, isn’t it best left to the markets to penalize it and demand a higher cost of funding? In any case, who’s to say 2:1 is a safe boundary as far as leverage goes? In L&T’s case, the ratio is bloated to an extent because of its financial services subsidiary which, like other firms in its sector, operates on far higher leverage than non-financial companies.

Last, but not the least, Sebi took as many as 102 days to inform L&T’s bankers about its decision, with the sole reason given being the flouting of the debt-equity ratio. How long does it take to calculate the debt-equity ratio of a company? Even if we give some allowance for the self-inflicted confusion on whether consolidated or stand-alone results should be considered, a period of three-and-a-half months is clearly taking things too far.

It’s worth recalling the Supreme Court’s rap on the knuckles to Sebi in its case against Akshya Infrastructure Pvt. Ltd, where the regulator delayed giving comments on the latter’s open offer letter by 13 months: “Such kind of delay is wholly inexcusable and needs to be avoided. It can lead to avoidable controversy with regard to whether such belated action is bona fide exercise of statutory power by Sebi. By adopting such a lackadaisical, if not callous attitude, the very object for which the regulations have been framed is diluted, if not frustrated."

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