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Shareholders of large companies having non-banking financial companies (NBFCs) and housing finance companies (HFCs) as subsidiaries can remain hopeful, if SEBI’s proposal on buyback see the light of day.
The Primary Markets Advisory Committee (PMAC) of the Securities and Exchange Board of India has proposed that when companies announce share buybacks, the post buyback debt-to-capital and free reserves ratio of 2:1 should be considered on consolidated basis, excluding subsidiaries that are regulated and have AAA ratings. Such subsidiaries should not have a debt-to-equity ratio of more than 5:1 on standalone basis, according to the Committee’s suggestions.
For companies with NBFCs and HFCs as subsidiaries, standalone financial numbers will be used to determine the debt-to-capital ratio, the new norm said. Further, the PMAC suggested that infrastructure companies should not have such exclusion, as they are not separately regulated.
Currently, there is no clarity on whether the debt-to-equity ratio considered for a buyback should be on consolidated basis or on standalone basis.
L&T episode
The buyback rules state that “the ratio of the aggregate of secured and unsecured debts owed by the company after buyback shall not be more than twice the paid-up capital and free reserves”.
It may be recalled that in January, the market regulator had rejected L&T’s ₹9,000-crore buyback proposal as the group’s consolidated debt-to-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 the subsidiary L&T Financial Services. The SEBI decision then had created a lot of buzz among market participants.
The proposals are welcome. First, this eliminates ambiguity about the buyback regulations. The debt-to-equity ratio based on consolidated accounts mooted by the advisory committee seems reasonable, as most companies set up subsidiaries to execute certain special projects. So, consolidated accounts do matter to avoid messy situations such as those thrown up by Infrastructure Leasing and Financial Services.
Besides, the proposals also ensure that buyback does not result in over-leverage by the company. At the same time, the exemption to NBFC subsidiaries recognises the ground realities of financial services.
Large companies can opt for the buyback option, if they decide to reward investors, as it is better than dividend payouts, which may pinch shareholders with higher tax outgo.
SEBI seeks comments on the discussion paper till June 12.
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