The move had sparked debate in the market on whether Sebi erred in its judgment to shoot down the proposal, prompting the group to file a review application with the regulator.
“If there is an error on the part of the regulator, the entity can always point out the error and ask the regulator to review its previous position,” said Sandeep Parekh, founder, Finsec Law Advisors. “If it is still aggrieved, then it has the option of going to the Securities Appellate Tribunal (SAT).”
L&T decided to approach Sebi again instead of appealing to SAT because it wants to complete the buyback within one year from the date of the announcement, said one of the people quoted above. The company had announced the buyback plan on August 23, 2018. L&T declined to comment for the story.
Analysts said this was possibly the first time the regulator had raised the question of consolidated financial metrics versus standalone financial metrics.
Sebi’s buyback rules of 2018 said the ratio of the aggregate of secured and unsecured debt owed by the company after the buyback should not be more than twice the paid-up capital and reserves of the company. The rule doesn’t specify that the computation of the debt to equity ratio has to be on consolidated financials. In the case of L&T, Sebi interpreted that the key financial matrix should be calculated on consolidated numbers. This interpretation was informally communicated to L&T.
L&T had approached Sebi for approval of its share buyback proposal — the first in its 80-year old history —based on standalone financial ratio. The debt levels for the group went up mainly because of L&T Finance. The regulator felt the borrowings by the finance subsidiary should also be considered at the group level. In L&T’s case, its financial services arm has a debt to equity ratio of 6:1, although this is within the leverage limits of the RBI.
Subsequently, the conglomerate is believed to have taken a legal opinion. Lawyers have told the L&T management that the Companies Act and Sebi rules take standalone numbers into consideration and not consolidated.
“Sebi has written saying they don’t approve the buyback as they see it. We are evaluating various options. The reason for rejecting is that they included the financial subsidiary. It’s a bit harsh. We are studying it and will decide what has to be done,” L&T’s CEO SN Subrahmanyan had told reporters last month.
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