Equity buyback offers are set to be hit by a double whammy.

After the Finance Ministry imposed a 20 per cent tax on share buybacks in the Budget this year, SEBI is likely to further tighten norms on the scheme that was mainly used by listed companies to return surplus cash to shareholders.

The market regulator is likely to impose a limit of 25 per cent for buyback offers by listed companies of their aggregate paid-up capital and free reserves, per the SEBI board meet agenda seen by BusinessLine .

Both standalone and consolidated financial statements will have to be considered for calculating the maximum permissible buy-back size. SEBI will also mandate shareholder approval via a special resolution for share buybacks that exceed 10 per cent.

Companies with post buyback debt-to-equity ratio of more than 2:1 on a consolidated basis will not be allowed to implement a buyback. However, there is a leeway here for companies that have non-banking and housing finance companies as their subsidiaries.

Experts say such norms will only hurt shareholders being rewarded by the company. Already, not all shareholders are able to fully tender their shares in buyback offers as the acceptance ratio is low. With the new SEBI norms, the ratio will further fall, making buyback offers unattractive, experts say.

A counter view is that many companies were parking their debt in subsidiaries and not giving a correct picture of their leverage, which is now being curbed.

“Buyback offers helped churn a lot of trading volumes on exchanges but tough norms and a 20 per cent tax will discourage companies from buybacks. Also, companies were just returning excess cash post taxes to shareholders. But the recent government move, and now SEBI’s strictures, seem to deter such cash rewards to shareholders,” a legal expert said.

The same debt-to-equity ratio parameters will not be applicable to non-banking and housing finance companies as they are primarily in the business of selling debt. The threshold for such companies will be 5:1 debt-to-equity ratio on a standalone basis.

Another legal expert observed that SEBI had unnecessarily panicked in not allowing the buyback of shares by L&T initially this year only as it saw very high debt-to-equity ratio in subsidiaries without realising that they were finance companies.

“Now, by imposing general strictures, instead of going case by case, SEBI could kill whatever little attraction was left in buybacks after the tax announced in the Budget,” a former regulatory official said.

Review of credit ratings

SEBI’s board meeting on Wednesday will also see a review of norms with regard to credit rating agencies (CRAs) and mutual fund (MF) investments.

SEBI will mandate that CRAs take the ‘explicit consent’ of companies, whose instruments they rate, to obtain details related to their existing or future borrowings of any nature, their repayment or delay or default if any.

Such information could help CRAs better judge the company’s financial position and default chances, according to the regulator.

Taking a stricter view on the working of MFs due to the ongoing crisis in the industry, SEBI has restricted them from investing in unlisted equity and debt instruments.

The regulator is likely to relax norms on ‘soon to be listed’ instruments to enable MFs to make pre-IPO anchor investments.