Sebi interpretation does not permit smaller L&T buyback

Shares of Larsen & Toubro Ltd opened over 3% lower on Monday after market regulator Securities Exchange Board of India denied the company permission for its first ever share buyback plan. However, the scrip pared all the losses and was trading 0.4% higher.

The stock had opened at ₹1,275 a share, or 3.3% lower than its Friday close. At 9.56 am, L&T was trading at ₹1,324 on the BSE, up 0.44% from its previous close. The Sensex rose 0.7% to 36,652.26 points.

"We estimate that the scrapping of the buyback could impact our RoE estimates by 150-165 bp over FY20F/21F. However, the impact may be limited to some extent in the case of a special dividend," Nomura Research said in a 21 January report

On Saturday, Sebi had rejected L&T’s proposal stating that the buyback plan was not in compliance, as the ratio of the aggregate of secured and unsecured debt after the buyback would be more than twice the paid-up capital and free reserves based on consolidated financial statements.

"Since the ratio of the aggregate of secured and unsecured debt owed by the company after the buyback (assuming full acceptance) would be more than twice the paid-up capital and free reserves of the company based on consolidated financial statements of the company, the buyback offer is not in compliance with Section 68(2)(d) of the Companies Act, 2013, and Regulation 4(ii) of SEBI (Buyback of Securities) Regulations, 2018. You are therefore advised not to proceed with this buyback offer," L&T, in a notice to exchanges, said it had been informed.

On 18 August, the company had announced the buyback involving 6.1 crore shares at ₹1,475 a share comprising 18.72% of its net worth.

L&T had considered standalone FY18 financial statements, however, Sebi had considered consolidated financials and this difference in interpretation led to the cancellation of buyback, Nomura research added.

Nomura Research analysis suggests that even a smaller share buyback by L&T is not feasible in Sebi's interpretation of the guidelines.

L&T's finance debt and development projects debt of ₹73,700 crore and ₹15,600 crore, respectively, for FY18 are considered in the calculations. Even if L&T considers a smaller reduction of equity, it may not be feasible as even without the buyback the ratio of the company's debt to equity at 2.24 times is already above the Sebi-mandated limit of 2.0 times. Even on a net debt basis the ratio is at 1.89 times, which would allow a buyback size of just ₹1,700 crore.