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.

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New buyback rules by SEBI may safeguard NBFC from systemic risks