L&T had proposed to buy back up to 6.1 crore shares from shareholders at a price of Rs 1,475 per share, aggregating to Rs 9,000 crore.

SEBI refuses LTs share buyback offer says not in compliance with its rules
Money Corporate Tuesday, January 22, 2019 - 09:22

After market regulator Securities and Exchange Board of India (SEBI) denied permission to engineering and construction conglomerate Larsen and Toubro (L&T) for its Rs 9,000-crore share buyback offer, the company’s shares on Monday fell by over 3%.

The L&T stock, however, recovered during the day to close flat at Rs 1,314.20 a share, down 0.31 per cent on the BSE. On Tuesday too, it opened nearly flat, though in the green at Rs 1,315.25 a share on BSE.

In a regulatory filing with the stock exchanges on Saturday, the company said SEBI asked it not to go ahead with the buyback.

In a letter to L&T, the regulator said the buyback offer is not in compliance with Sebi rules as well as the Companies Act "since the ratio of the aggregate of secured and unsecured debts owed by the company after buyback (assuming full acceptance) would be more than twice the paid-up capital and free reserves of the company based on consolidated financial statements".

L&T had proposed to buy back up to 6.1 crore shares from shareholders at a price of Rs 1,475 per share, aggregating to Rs 9,000 crore. The offer was open to those holding equity shares as on October 15.

Reacting to the development, analysts said that SEBI scrapping the buyback could impact the return on equity (ROE) estimates for the next fiscal.

"L&T had considered standalone FY18 financial statements. However, Sebi had considered consolidated financials - this difference in interpretation led to cancellation of buyback," Japanese brokerage Nomura research report said on Monday. 

"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. 

"Special dividend is an alternative since buyback option is effectively ruled out post Sebi ruling," the report added. 

Describing Sebi's buyback refusal as a negative surprise,JP Morgan said: "Better than expected core P&L (profit and loss) performance in Q3 may assuage worries around execution." 

Reacting to the developments Goldman Sachs said it sees this as a potentially negative news flow for L&T as this was one of the steps to be taken by the company to reach its target ROE of 18 percent by FY21. Any potential buyback could have further helped L&T reach its ROE target. It expects the company to proceed with its plans to meet its ROE target, including the sale of its electrical and automation division.

While broakrage firm Macquarie said, "L&T can explore alternative methods to redistribute excess capital."

Adding that it believes the regulator's view to consolidate debt of L&T Financial Services is too conservative. Knee-jerk reaction possible, but it would create an opportunity to buy the stock. Company could reaffirm its stance of distributing excess capital to shareholders.

CLSA said that the regulator is mistaken in looking at consolidated financials, particularly when L&T has not guaranteed the debt of L&T Finance-47 per cent of consolidated debt. 

"Given its focus on return-on-equity enhancement, it thinks L&T's board could approve a one-time large dividend (about Rs 53 a share) this week. This would help L&T's ROE to expand (120 basis points in FY20 versus current estimates," added CLSA. 

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