Sebi turns down L&T's Rs 9,000-cr share buyback citing compliance issues

The Securities and Exchange Board of India (Sebi) has denied approval to Larsen & Toubro’s (L&T’s) Rs 9,000-crore share buyback plan, citing compliance issues over its post-buyback debt-equity ratio.

“You are, therefore, advised not to proceed with this buyback offer,” the market regulator wrote in its January 18 letter to L&T. “Since the ratio of the aggregate of secured and unsecured debts owed after the buyback would be more than twice the paid-up capital and free reserves based on consolidated financial statements, the buyback offer is not in compliance.” 

L&T sent a copy of the letter to the stock exchanges on Saturday. L&T executives, however, argued the regulator had not mentioned ‘consolidated’ debt in its regulations earlier.

In August last year, the L&T board approved its first buyback in 80 years of the company’s history, for up to 4.29 per cent of its paid-up equity capital, aggregating to a value of about Rs 9,000 crore, subject to approvals. This was the fifth largest by any Indian company in terms of amount proposed. L&T applied for the buyback in compliance with the required ratio post buyback on the basis of its standalone financial statements.

“The said basis for computation of debt-equity ratio based on the consolidated financial statement appears internal to Sebi and is not specified in its buyback of securities regulations,” said an L&T executive, who did not wish to be named. “L&T would not have initiated the buyback proposal had the basis of computation of the ratio been specified in the regulation.”

If other financials remain the same and the buyback was funded from the company’s reserves, L&T’s consolidated net debt-equity ratio would go up to 2.26 times against 1.9 times based on its September 2018 consolidated numbers, according to Business Standard calculations. 

On a standalone basis, L&T's net debt/ equity ratio would have gone up marginally from 0.17 times to 0.21 times, which would have been well below the stipulated ceiling of two times.

Analysts expect some ‘sell’ activity in Monday’s trade, but say the impact on the stock price is unlikely to be significant. “The development may impact a small group of retail investors who bought shares in anticipation for a buyback. Given it is retail, I do not expect it to have a major impact,” said an analyst with a domestic brokerage firm who did not wish to be identified.

In August, S N Subrahmanyan, chief executive officer and managing director, L&T, said the move was to ensure shareholders received a better return on their investments. Back then, company officials were hopeful the buyback would be completed in three months.

The latest development will not meet L&T’s objective of improving shareholder value. “The buyback was an attempt to improve the return on equity as the share was considered to be under-valued. In the absence of a buyback that will not happen now,” the analyst quoted above added.

In the past one year, L&T has divested from a couple of non-core assets, with the proposed sale of its electrical and automation division being one of the largest at Rs 14,000 crore.

A buyback valued at Rs 9,000 crore would have translated into higher cash outflows, which may now not happen with the latest development.

“It is heartening to note that Sebi has started looking into such details which will go a long way in improving compliance and governance. In this particular case, there seems to be a difference of opinion between Sebi, the company and analysts,” said JN Gupta, managing director at Stakeholders Empowerment Services, a proxy advisory firm. 

He added that under the Companies Act, standalone is considered, but for a real analysis, all ratio should be taken including consolidated as it reflects the true financial picture.  

It is not clear whether L&T will look to revise its buyback offer in compliance to its consolidated financial numbers or pursue the current offer and legally contest Sebi’s order. “It is to be noted that the consolidated financials of L&T includes debt of L&T’s financial services business which by its permitted operating model has debt-equity of nearly 6:1 times, well within the leverage permitted by the Reserve Bank of India,” the official quoted earlier added.

Gupta argues that at present there are no regulations to help differentiate between financial subsidiaries, which have a higher debt-equity ratio, and and non-financial subsidiaries. In cases like L&T where it is a genuine reason for the higher debt-equity ratio at the consolidated level, Sebi may have to consider exemptions on a case to case basis.

L&T will report its earnings for the December quarter next week and the street may look for further clarity in the management’s guidance post results.

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