Capital markets regulator, Securities and Exchange Board of India (SEBI) relaxed norms for buyback of shares by firms listed with it, especially for those having its presence in housing finance and NBFC segments. The announcement comes after the SEBI board approved these norms in August.
Repurchase of shares by listed companies is ruled by the Buyback Guidelines of SEBI and the Companies Act. Some of the important conditions that the companies need to remember are: the offer for buyback cannot be more than 25 percent of the total of aggregate paid-up capital and free reserves of the company. Consent of shareholders through a special resolution is a requisite in the event the size of buyback exceeds 10 percent.
Buyback is also allowed in case the ratio of the aggregate of secured and unsecured debts that a company owns after the buyback does not exceed twice the amount of paid-up capital and free reserves, except when a higher debt-to-equity ratio is stated under the Companies Act.
SEBI, while calculating the buyback threshold takes into consideration the financial statements on an individual as well as a consolidated basis. However, in the recent past several concerns have been brought to the notice of SEBI regarding considering consolidated financial statements for organizations with subsidiaries having high debt because of their presence in Non-Banking Financial Company (NBFC) and housing finance segments. Another reason for SEBI considering revising its regulations is due to the notification by the Corporate Affairs Ministry allowing government organizations who are into non-banking finance and housing finance activities to undertake buybacks resulting in debt to equity ratio of up to 6:1 to apply for share repurchase.
However, SEBI has decided to continue with the existing process of permitting buybacks that result in a post-buyback debt-to-equity ratio of up to 2:1; except for firms which are allowed to have a higher ratio as per the notification of the Companies Act, based on both standalone and consolidated basis.