Sebi floats discussion paper to plug gaps in buyback regulations

Presently, there is ambiguity on whether standalone and consolidated financials should be considered by evaluating various thresholds and conditions for buybacks

The Securities and Exchange Board of India (Sebi) on Wednesday floated a discussion paper to plug gaps in the buyback regulations. 

At present, there is ambiguity on whether stand-alone and consolidated financials should be considered while evaluating various thresholds and conditions for buybacks. A company is permitted to conduct a buyback if its debt-equity ratio doesn’t exceed 2, after repurchase of securities. 

However, neither the Companies Act nor Sebi buyback regulations specifically provide for consideration of stand-alone or consolidated financials for determining the requirement of debt-equity or free reserves. In the paper, Sebi has proposed that debt-equity ratio be considered on a consolidated basis, but should be excluded only if subsidiaries are regulated and have issuances with AAA-ratings. 

Further, it states that the subsidiaries should have debt-equity ratio of below 5 on a stand-alone basis. 

More importantly, Sebi has proposed that debt-equity ratio of 6 can be allowed for subsidiaries that are either non-banking financial companies (NBFCs) or housing finance companies (HFCs). 

The Ministry of Corporate Affairs (MCA) had, in 2016, allowed government NBFCs and HFCs to conduct buybacks if their debt-equity ratio didn’t exceed 6. Further, NBFCs, HFCs and infra companies have typically high debt-equity, given the RBI allows them to have leverage of up to 7:1 for non-deposit-taking NBFCs with assets below Rs 500 crore.

The gaps in buyback regulations had come to the fore in January, after Sebi had rejected L&T’s Rs 9,000-crore buyback proposal. Though L&T’s stand-alone debt-equity ratio after the buyback would have been at comfortable levels of 0.5 times, it would have breached the threshold of 2 on a consolidated basis. The rejection had sparked a debate on whether Sebi should consider the debt on a standalone or consolidated basis, particularly if the subsidiary was in the business of financing, where high debts are a norm.