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.



* 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



* 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








FII/FPI net equity investment    


US$ mln



FII/FPI net debt investment


US$ mln



DIIs net equity investment  


bln rupees



DIIs net debt investment 


bln rupees


(-) 9.25



* 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 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:


Compiled by Vijay Malkar

Edited by Ashish Shirke


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