Capital markets regulator Sebi has eased its norms for buyback of shares by listed companies, especially those having subsidiaries in housing finance and NBFC segments. The notification comes after the board of Securities and Exchange Board of India (Sebi) approved norms in this regard in August.
The repurchase of shares by listed companies is governed by the Buyback Regulations of 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 Non-Banking Financial Company (NBFC) and housing finance segments.
Sebi’s decision to amend its regulations also follows 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 decided 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, the regulator said in a notification dated September 19,
But, the standalone debt to equity ratio of all such excluded subsidiaries should not exceed 6:1, as per the approved norms, it added.
Earlier, Sebi had proposed to keep this threshold at 5:1.
Under the new rules, the financial statements would be considered on both standalone and consolidated basis to determine the maximum permissible buyback size and other related requirements.