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SEBI Watch: New buyback norms may safeguard NBFC from systemic risks

Friday, May 24

 

By Chiranjivi Chakraborty

 

Earlier this year, the Securities and Exchange Board of India came under criticism for rejecting a proposed 90-bln-rupee share buyback of Larsen & Toubro on grounds that the debt-to-equity ratio of the consolidated entity exceeded the maximum permissible level.

 

The criticism against the regulator was that it was making an error by holding L&T to the sword over the debt-to-equity ratio mandate even as the consolidated entity included a non-banking finance company, which, by nature of its business, has to borrow more to grow.

 

Currently, SEBI guidelines on share buyback mandate that the consolidated debt-to-equity ratio, a measure of indebtedness of a company, should not exceed 2:1 at the consolidated level.

 

The market regulator responded to the criticism by proposing that the mandated debt-to-equity ratio of any company that has a non-bank lending subsidiary be applicable on a standalone basis for a share buyback.

 

However, as an additional measure, the regulator has proposed that the non-bank lending subsidiary must have a debt-to-equity ratio of 5:1 and a credit rating of AAA.

 

By limiting the debt-to-equity ratio of a non-bank lending subsidiary to a level that is lower than that 7:1 required by the Reserve Bank of India, the regulator appears to be safeguarding such companies from future systemic risks by demanding that they hold a certain level of cash on their books.

 

The non-banking finance sector has been under pressure because these companies use short-term borrowing to fund long-term projects in the hope that they will be able to refinance the borrowings as long as market conditions remain favourable.

 

After the default of Infrastructure Leasing & Financial Services in August, the cost of borrowing blew up as market lost confidence in NBFCs, making it difficult for them to rollover their debt. The asset-liability mismatch that ensued has threatened to unravel the entire domestic financial system.

 

SEBI cannot regulate non-bank lenders on the asset-liability mismatch as that is the RBI's jurisdiction.

 

However, by demanding that NBFC subsidiary of a company that wishes to buyback its stocks have a much tighter debt-to-equity ratio than that demanded by RBI, the regulator appears to be thinking of the long-term benefit of investors and the market at large.

 

In an ideal world, there would have been uniformity among regulators on what level of indebtedness of a non-bank finance company is acceptable, but in its absence the market regulator has done well to finally move the needle on the issue.

 

LATEST ANNOUNCEMENTS

* SEBI seeks to cut time for rights share issue to 31 days vs 58 days

* SEBI mulls stricter share buyback norms for infra, NBFCs, home fin cos

 

ORDERS, ADJUDICATION PROCEEDINGS

* SEBI fines 5 entities 3.9 mln rupees for manipulative trade in BSE stock options segment (PTI)

* Appellate tribunal asks NSE to transfer 6.87 bln rupees to SEBI within two weeks (BS)

* SEBI fines 4 entities 2.2 mln rupees for fraudulent trade (PTI)

 

REGULATIONS (Announced in the past three months)

* SEBI allows portfolio management services in commodity derivatives

* SEBI allows MFs to trade in commodity derivatives with riders

* SEBI lowers subscription floor for REIT, InvIT IPOs

* SEBI revises commission norms for mutual fund distributors

 

DATA FROM SEBI

 

Date 

Unit

Latest

Previous

FII/FPI net equity investment    

May-22

US$ mln

(-)106.27

223.78

FII/FPI net debt investment

May-22

US$ mln

(-)79.98

29.21

DIIs net equity investment  

May-22

bln rupees

0.66

(-)10.6

DIIs net debt investment 

May-22

bln rupees

32.12

(-) 9.25

 

IPO/FPO/NFO

* Emami Cement gets SEBI approval for initial public offer

* Mirae Asset MF seeks SEBI's nod for fixed maturity plan

* DSP Mutual Fund Launches DSP Quant Fund on May 20, which will close on Jun 3

 

SEBI IN NEWS

* SEBI probing if mutual funds did bond deals to prop up returns (ET)

* Bank of Baroda eyes new partner for AMC arm, to seek SEBI OK in a mo

* Fortis investors move SEBI over delay in IHH open offer, seek interest (Mint)

* SAT asks SEBI to revisit Tenneco open offer price for Federal-Mogul

 

Sources – Television, print, or Web editions of:

 

PTI–Press Trust of India, BS–Business Standard, ET–The Economic Times

 

Internet links: http://www.sebi.gov.in

 

Compiled by Vijay Malkar

Edited by Ashish Shirke

 

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