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SEBI may tighten buyback norms, cap issue at 25% of paid-up capital & free reserves

The move comes on the heels of a 20 percent tax on share buybacks imposed by the Finance Ministry in Budget 2019 and is apparently aimed at providing a correct picture of companies’ leverage status.

August 21, 2019 / 11:12 AM IST

The Securities and Exchange Board of India (SEBI) may heighten regulations on share buybacks and impose a 25 percent cap on such offers by listed companies of their aggregate paid-up capital and free reserves, reports Business Line.

The development is on the agenda for the SEBI board meeting scheduled for August 21, the report said. Moneycontrol could not independently verify the report.

The move comes on the heels of a 20 percent tax on share buybacks imposed by the Finance Ministry in Budget 2019 and is apparently aimed at providing a correct picture of companies’ leverage status.

Also read: SEBI building framework to allow rating agencies access to loan default information

The norm would make it mandatory to take into account the company's standalone and consolidated financial statements while approving its buyback size and also makes a provision for shareholder approval via special resolution for buybacks that exceed 10 percent, the article noted.

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Companies with a consolidated post-buyback debt-to-equity ratio of more than 2:1 would be disallowed from implementing such schemes, the report said.

Companies with non-banking finance companies (NBFCs) and housing finance companies (HFCs) as subsidiaries would be subject to a standalone 5:1 debt-to-equity ratio, it said.

Share buybacks are usually undertaken to return surplus cash to shareholders. The article quoted experts as saying that such norms would only hurt beneficiaries as given the lower acceptance ratio for buyback offers, the increased restrictions would only make the exercise more undesirable.
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