Ravi Krishnan
Once bitten, twice shy. The Securities and Exchange Board of India’s (SEBI's) surprise rejection of Larsen & Toubro’s buyback proposal should be viewed through the lens of the IL&FS debacle. The markets regulator said L&T’s buyback offer will push its debt-to-paid-up capital and free reserve ratio above two times, which violates SEBI’s buyback regulations. The catch: SEBI has considered the consolidated financials of L&T, which among others fold in the numbers of its subsidiary, L&T Finance Holdings.
Obviously, a financial services company will have a higher leverage ratio – around 6:1 in L&T Finance Holding’s case, well within Reserve Bank norms. But L&T Finance’s Rs 80,000 crore debt is bound to tell on the consolidated numbers of the parent.
Now, the Companies Act, 2013 and SEBI’s own buyback regulations don’t specify whether standalone or consolidated financials should be used. The market regulator has thus taken a very conservative stance. That is the right position to take considering the crisis at IL&FS, where the standalone numbers painted a much rosier picture than the consolidated financials. This is not to say that L&T should be equated with IL&FS and that there are questions about the former’s numbers. L&T could well feel aggrieved because it is not a guarantor of L&T Finance’s debt too.
But it boils down to a matter of principle. It is well accepted that consolidated numbers present a truer picture of a company’s financial strength and its liabilities. SEBI can’t be looking at standalone numbers in one case and consolidated financials in another. By considering consolidated numbers, SEBI has in a way nudged companies towards more disclosure, which will ultimately lead to better governance as well.
SEBI’s ruling also raises the question of whether non-banking financial companies (or their parents) would ever be able to buy back shares because of the strict interpretation of regulations. Note that the central government issued a circular in March 2016 which said this rule was relaxed to a 6:1 ratio for public sector non-banking financial companies.
Such dispensations should be owner-agnostic. They should also be clear. SEBI would do well to re-look its regulations and redraft them to specify clearly that consolidated numbers are the one that matter, and separately also decide whether a special dispensation can be granted for NBFCs who want to buy back shares.
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