SEBI is Likely to Ease Share Buyback Norms: For NBFCs and HFCs

The proposal to ease share buyback norms for NBFC is expected to be presented at the regulator’s board meet. The regulator of Capital market i.e. SEBI is likely to ease its norms for buy-back of shares by Listed Companies.

The Reason Behind the Proposal

The main reason behind the proposal is the liquidity crisis hitting the Non-Banking Financial Companies, Housing Finance Companies, SEBI might ease the share buy-back norms for these.

Key Points of the Proposal

Once the proposal approves, the below-mentioned points are required to be implemented-

1. The Proposed norms will follow the government’s scheme to provide a one-time partial credit guarantee to public sector banks (PSB) for the purchase of pooled assets of financially sound NBFCs.
2. For NBFCs and HFCs- The option is to buy-back their assets after a specified period of 12 months as a repurchase transaction.

Note: In case of listed companies – The share buy-back procedure is regulated under

I. Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018.

II. Companies Act, 2013^[1].

• The company including (NBFCs and HFCs) wants to buy-back more than 10% of the aggregate of the paid-up capital and free reserve, but up to 25% of the paid-up capital and free reserve shareholders’ approval through a special resolution in the general meeting is required.
• As per the Companies Act, the debt-equity ratio shall be less than or equal to 2:1. After buy-back, the debt should not be more than twice the equity.

However, the debt-equity ratio for the government companies carrying Non-banking financial and housing finance activities is 6:1.

Exception–There are Companies for which a higher ratio has been notified under the Companies Act, based on both standalone and consolidated basis.

Buybacks would still be allowed if the debt to equity ratio does not exceed 2:1, in case of standalone basis, but exceeds this threshold on a consolidated basis, i.e. if the consolidated ratio is up to 2:1 after excluding the subsidiaries that are NBFCs and housing finance companies regulated by RBI or National Housing Bank.

However, in any case, the standalone debt to equity ratio of all such excluded subsidiaries should not exceed 5:1.

However, the regulator felt it difficult to enforce the proposed rating requirement as it would be difficult to prescribe and enforce the same due to practical implementation challenges such as dynamic changes in ratings, tenure of ratings and difference in ratings of short-term and long-term instruments.

As a result, SEBI has decided not to exclude the regulated subsidiaries with AAA ratings for computing the debt-equity ratio on a consolidated basis

• More stringent regulations for liquid mutual funds.
• SEBI’s proposal also follows a notification by the Corporate Affairs Ministry permitting to launch buyback resulting in up to 6:1 debt to equity ratio post the share repurchase for the government companies carrying out NBFC and HFC activities.

Conclusion

Taking into consideration the loopholes of NBFCs and HFCs, SEBI has proposed to bring the stringent regulations for liquid mutual funds and to ease share buyback norms for NBFC.