The RBI move to allow banks to raise stake in troubled firms to 30 per cent by converting their debt into equities has moved a step closer with Sebi today saying its board will take a call on the matter in next meeting.
The Reserve Bank Governor, at the February 3 policy meet, had said a final call on the move would have to wait for the market regulator’s views on pricing as interest of non- lender shareholders also had to be taken into consideration.
“My feeling is that in our next board meeting we will be able to take up this proposal for approval,” Sebi Chairman U K Sinha told reporters on the sidelines of a function at Patalganga near here. However, the Sebi chief did not specify when the next board meeting will take place.
Sinha was responding to queries from journalists on allowing banks to convert their debt into equities in troubled companies, as is being demanded by banks and the RBI.
On February 3, Governor Raghuram Rajan had said RBI was close to reaching an agreement with Sebi on valuation of companies undergoing debt restructuring.
He had noted that valuation was the key issue when a bank, allowed by the RBI to increase its stake in a company to up to 30 per cent, makes a move to exercise the same.
“Sebi is interested in protecting the rights of the minority shareholders and the RBI is interested in making sure banks do not convert at too high a price and given a fair value. The discussion with Sebi is coming to some agreement.”
The RBI recently allowed banks to up their stakes in companies they have lent to while they go about restructuring their debt so as to ensure their asset gets saved.
It can be noted that in many companies like Suzlon, IVRCL, Kingfisher Airlines and Deccan Holdings, among others, banks hold stakes following their loan recast. If banks raise their stakes in IVRCL, they will be together holding close to 97 per cent in the Andhra Pradesh-based infra lender.
Sinha further said “the impression from banks and also from the RBI is that the Sebi’s pricing formula at times works against the interests of bankers. So we are examining that.
Our dialogue with the RBI is at a fairly advanced stage. We will be able to take it up at the next board meeting.”
Talking to reporters at the same venue, RBI Deputy governors R Gandhi, asked about the same, said “we are discussing with Sebi on the pricing part. Sebi has its own rules and responsibilities to protect minority shareholders’ interest vis-a-vis bankers’ requirements.” .
Gandhi referred to the changes the Government recently made in the Companies Act to enable such a move. “Recently, in the Companies Act also there was some tweaking to help out in this. So we will finalise with the Sebi.”
Banks are facing increased stress on assets in the wake of lingering slowdown in the domestic economy. An Icra report yesterday said the total NPAs in the system are set to touch 5.7 per cent by 2015-16 from 4.5 per cent in the third quarter of 2014-15.
The rating agency attributed the possible spike in NPAs to the end of the regulatory forbearance on restructured assets from April.
State-run banks’ gross NPAs crossed 5 per cent mark by the December 2014 quarter, owing to sharp drop in recoveries which stood at 14 per cent in the third quarter of FY15 from 25-40 per cent in the previous two quarters.
Recoveries of PSBs were impacted by a difficult operating environment as well as the RBI’s August 5, 2014, regulation tightening the norms for sale of NPAs to asset reconstruction companies, Icra Senior Vice-President Vibha Batra said in the report.
Private banks’ gross NPAs and restructured advances stood at a low 2.1 per cent and 2 per cent respectively, as of third quarter of 2014-15, largely unchanged from the September levels, she had said.
Public sector banks’ fresh NPA generation was impacted by higher slippages from restructured accounts, which stood at around 25 per cent of new NPAs generated during the third quarter, Icra said.
“Slippages from restructured accounts, fresh flow into restructured accounts in Q4 and recoveries from NPAs would determine the asset quality indicators in future,” she said.
Overall, banks’ fresh NPA generation during the nine months of this fiscal at around 3 per cent was lower than 3.3 per cent in the year ago period, but higher than levels in FY12 and FY13 at 2.5 and 2.7 per cent respectively, she said.
The restructured assets in the system had increased to 6.2 per cent as of September 2014, as against the 5.9 per cent in March 2014, according to RBI’s financial stability report.
On the rising bad loans in the system due to the new CDR norms coming into force from April, Gandhi today said the RBI has been continuously saying that there can be more slippages in restructured accounts.
“We have been warning banks that they should be looking at the entire stressed assets and not just NPAs. That is why we have been paying attention not just on the declared NPAs but the total whole stressed accounts.
“On how long the NPA issue is likely to haunt banks? Our expectation on growth is positive, so growth should help them to come out of this problem,” he said.