In a step to rein in wilful defaulters and curb the menace of rising bad loans, RBI on Monday issued a notification allowing banks to seize control of a company if a debt restructuring fails and sell their stake in the defaulting firm to recover dues.
While India Inc has struggled with debt, banks have been hit the most with rising non-performing assets. “The general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders,” the bank said while allowing transfer of equity from promoters to lenders to compensate for their sacrifices.
The banking regulator also noted that several borrower companies have not been able to come out of stress due to operational/managerial inefficiencies and in cases where change of ownership is a preferred option Joint Lenders Forum (JLF) shall do so before converting loan into equity.
Laying down the new norms under the strategic debt restructuring scheme, RBI said, “at the time of initial restructuring, JLF must incorporate, in the terms and conditions attached to the restructured loans agreed with the borrower, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones and/or adhere to ‘critical conditions’ as stipulated in the restructuring package.”
RBI laid guidelines for takeover of company by JLF, highlighting that the JLF shall hold minimum of 51 per cent stake in the company. The central bank also highlighted that in no case JLF could convert equity without approval of minimum 75 per cent of creditors by value and 60 per cent creditors by number of JLF.
The conversion of debt into equity as approved under the strategic debt restructuring (SDR) should be completed within a period of 90 days from the date of approval of the SDR package by the JLF, RBI said. On the pricing formula for conversion RBI suggested use of ‘fair value’ pricing which shall not exceed market value or break-up value.
These norms would also be applicable to pre-existing loan default cases provided it met other filters.
RBI has clarified that debt converted into equity through this route would be outside the purview of SEBI’s takeover norms which require a mandatory open offer for listed firms if a new investor gains over 25 per cent equity stake.
The bank regulator added that JLF and lenders should divest their holdings in the equity of the company as soon as possible. On divestment of banks’ holding in favour of a ‘new promoter’, the asset classification of the account may be upgraded to ‘standard’, the central bank said.
While RBI has cut rates thrice this year, banks have been less than willing to pass on the benefits of rate cuts to the consumers given the low profitability in the sector. The recent decision by the RBI shall give more teeth to the banks to recover their loans and boost credit in the system.