A proposal in this regard was approved by Sebi's board at its meeting here. The repurchase of shares by listed companies is governed by the Buyback Regulations of the Securities and Exchange Board of India (Sebi) as well as the Companies Act.
Among the main conditions that the companies need to follow, the buyback offer cannot exceed 25 per cent of the aggregate paid-up capital and free reserves of the company, but shareholders' approval is required through a special resolution in case the size exceeds 10 per cent.
Also, a buyback is permitted only if the ratio of the aggregate of secured and unsecured debts owed by the company after the buyback is not more than twice the paid-up capital and free reserves, unless a higher debt-to-equity ratio is specified under the Companies Act.
While Sebi takes into account financial statements on standalone as well as consolidated basis for evaluating the buyback thresholds, several issues have been raised in the recent past with regard to considering consolidated financial statements for companies with subsidiaries having higher debt due to their presence in businesses like NBFC and housing finance segments.
Sebi's proposal to amend its regulations also follow a notification by the Corporate Affairs Ministry permitting government companies carrying out non-banking finance and housing finance activities to launch buybacks resulting in up to 6:1 debt to equity ratio post the share repurchase.
After taking into account the feedback to a public consultation process launched in May, Sebi has now proposed to continue with the current approach of allowing buybacks resulting in post-buyback debt-to-equity ratio of up to 2:1, except for companies for which a higher ratio has been notified under the Companies Act, based on both standalone and consolidated basis.
However, if the debt to equity ratio on standalone basis does not exceed 2:1, but exceeds this threshold on consolidated basis, buybacks would still be allowed if the consolidated ratio is up to 2:1 after excluding the subsidiaries that are NBFCs and housing finance companies regulated by RBI or National Housing Bank.
But, the standalone debt to equity ratio of all such excluded subsidiaries should not exceed 6:1, as per the approved norms. Earlier, Sebi had proposed to keep this threshold at 5:1.
Sebi's Primary Market Advisory Committee had also suggested that regulated subsidiaries with AAA ratings should be excluded for computing the debt-to-equity ratio on consolidated basis.
However, after taking into account the feedback, the regulator felt it would be difficult to prescribe, monitor and enforce the proposed rating requirement due to practical implementation challenges such as dynamic changes in ratings, age of ratings and difference in ratings of short-term and long-term instruments.
Sebi has, therefore, decided to drop the condition relating to ratings.
Under the new rules, it would also be clarified that the financial statements would be considered on both standalone and consolidated basis to determine the maximum permissible buyback size and other related requirements.