The Securities and Exchange Board of India (Sebi) on Wednesday issued a discussion paper suggesting changes in buyback rules following Larsen and Toubro Ltd’s (L&T) buyback ordeal in January.
The proposal makes special dispensation for companies that have non-banking financial companies (NBFCs) and housing finance companies (HFCs) as subsidiaries.
Sebi has suggested that for companies with NBFCs and HFCs as subsidiaries, it would consider stand-alone financial numbers to determine the ratio, but that for all others it will take consolidated financial statements to determine debt-to-equity ratio.
NBFCs and HFCs typically have higher debt, which can skew the debt-to-equity ratio.
In January, Sebi had rejected L&T’s proposal to buy back shares worth ₹9,000 crore as the group’s consolidated debt-equity ratio would have crossed two times the paid-up capital and reserves after the buyback.
L&T’s consolidated debt was on the higher side due to L&T Financial Services. However, the NBFC’s debt-to-equity ratio, at 6:1, was within the Reserve Bank of India’s (RBI) limits. RBI allows leverage of 7:1 for NBFCs with assets of less than ₹500 crore.
Sebi, in its proposal, said that for companies that do not have NBFCs or HFCs as subsidiaries, excluding the financial details of subsidiaries would not be prudent.
“There is a concern that much of the activities of the subsidiaries are not available in the public domain. It is possible that the subsidiaries of a listed company would be having large amount of debts. The consolidated financial statement allows the investors to get a complete overview of the parent company," said Sebi.
Based on the recommendation of its primary market advisory committee, Sebi proposed that for companies that have NBFCs and HFCs in their group, their debt-to-equity ratio post-buyback would be on a stand-alone basis. The subsidiaries would need to be regulated and have issuances with AAA ratings, said Sebi, adding they must also have debt-to-equity ratio of not more than 5:1 on a stand-alone basis.
Sebi has invited comments till 12 June.
“Sebi paper does not provide a rationale for prescribing lower threshold as compared to RBI limits. It should be at par," said a senior officer with an NBFC, requesting anonymity.
To get approval for its proposed buyback, L&T will have to bring down the leverage ratio of L&T Financial Services if Sebi’s proposed changes become a norm.