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New buyback rules by SEBI may safeguard NBFC from systemic risks

Earlier in this year, SEBI came under criticism for refusing a proposed 90-bln-rupee share buyback of L&T on grounds that the debt-to-equity (D/E) ratio of the combined entity exceeded the maximum permissible level. The criticism was that it was making an error by holding L&T to the steel over the D/ debt-to-equity ratio command even as the combined entity involved an NBFC (L&TFH), which, by nature of its business, has to borrow more to grow. Presently, SEBI specifications on share buyback charges that the integrated D/E ratio, a quantity of indebtedness of a company, should not exceed 2:1 at the consolidated level.

SEBI acknowledged the criticism by suggesting that the compulsory D/E ratio of any company that has a non-bank lending subsidiary that should be applicable on a standalone basis for a share buyback. However, as an additional estimation, the regulator has offered that the non-bank lending subsidiary must have a D/E 5:1ratio and rating of a credit AAA. By restricting the ratio of D/E of a non-bank lending subsidiary up to a level that is lower than that 7:1 ratio that needs by the RBI, the regulator looks like to be protecting such companies from future systemic risks by asking that they hold a certain level of cash on their books.

In August after the default of IL&FS, the cost of borrowing explored as the market lost confidence in NBFCs, it makes very difficult for them to roll over their debt. There is an asset-liability mismatch that results has to pressure to unravel the whole domestic financial system. SEBI cannot control the non-bank lenders on the ALM as that is the RBI's jurisdiction. However, by asking that the NBFC subsidiary of a company that wishes to redeem its stocks have a much tighter ratio of D/E than that inquired by RBI, SEBI looks to be thinking of the long-term advantages of investors and the market at large.

The author may have places in the stocks as introduced in the article above, please assume us to be influenced. This is not an advice to buy or sell securities. This is purely some information about the company which is mentioned. Equity investing includes risks and please contact your financial adviser for any buy and sell securities!

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