Banks to take control of defaulting companies & change managements

RBI unveils strategic debt restructuring’ scheme to convert debt into equity and also bring foreign promoters

GN Bureau | June 9, 2015


#rbi   #RBI   #reserve bank of india   #banks   #default   #borrower  


In far-reaching and forward looking measure the Reserve Bank of India is going to allow banks to convert debt of defaulting companies into equity and bring about change in management of these companies.  Capital markets regulator Sebi has already relaxed the norms for banks to take over the ownership of such companies. Under the ‘Strategic debt restructuring’ scheme of the RBI the banks can also bring in foreign promoters with stake as low as 26%.

The notification: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/SDRS62783F81DA523634E0D8AF43D088360A754.PDF

The central bank said that it has been observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational or managerial inefficiencies despite substantial sacrifices made by the lending banks.

Under such circumstances, the RBI felt, change of ownership will be a preferred option and the Joint Lenders' Forum (JLF) should actively consider such change in ownership.

As per the notification issued on Monday, "at the time of initial restructuring, the 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."

As per the existing norms, it was allowed transferring equity of the company by promoters to the lenders to compensate for their sacrifices and transfer of the promoters' holdings to a security trustee or an escrow arrangement until the company turns around.

This was allowed with the objective to enable a change in management control if the lenders favour it. But direct stake pick-up was not allowed.

Now the RBI notification says that provisions of the SDR would be applicable to the accounts which have been restructured before the date of this circular provided that the necessary enabling clauses are included in the agreement between the banks and borrower.

The scheme
Post the conversion, all lenders under the JLF must collectively hold 51 per cent or more of the equity shares issued by the company, it said, adding, the share price for such conversion of debt into equity will be determined as per the defined formula.

The JLF must approve the SDR conversion package within 90 days from the date of deciding to undertake SDR.

The conversion of debt into equity as approved under the SDR should be completed within a period of 90 days from the date of approval of the SDR package by the JLF.

The JLF and lenders should divest their holdings in the equity of the company as soon as possible.

Comments

 

Other News

Thackeray launches three fast-track DNA units under Nirbhaya scheme

Maharashtra chief minister Uddhav Thackeray has launched three state-of-the-art human DNA units under the Nirbhaya Scheme for efficiency in criminal investigations. A wildlife DNA unit in Nagpur makes Maharashtra the country’s first state to have a forensic testing lab for animals.  

How foreign policy has been Modi’s focus right from the start

The Midway Battle: Modi’s Roller-coaster Second Term By Gautam Chintamani Bloomsbury / 400 pages / Rs 699 Gautam Chintamani, a film historian and author, has penned an in-depth chronicle of prime minister Narendra Modi’s second

Remove unauthorized constructions without pressure: Thackeray to BMC

Maharashtra chief minister Uddhav Thackeray has instructed the Mumbai civic authorities to take immediate action on unauthorized constructions on war footing. In a virtual meeting held on Wednesday, Thackeray said no illegal construction will be tolerated in Mumbai and called upon the BMC to

Covid norms relaxed; Mumbai restaurants, shops to remain open longer

After extending timings of shops and restaurants as well as the reopening of cinema halls and theatres under specified SOPs from October 22, in view of the festive cheer, the Maharashtra government has allowed restaurants and eateries to remain open till 12AM and shops and establishments to function till 1

Global Hunger Index data collection flawed: Arvind Panagariya

Rubbishing the recently released Global Hunger Index 2021, wherein India has slipped to 101 position to be placed below Pakistan, Nepal and Bangladesh, Arvind Panagariya, professor of economics at Columbia University and former vice chairman, NITI Aayog, has said that data collection and methodologies used

‘Blue Zones’ concept of healthy living and its relevance in India

A long life span free from diseases and disability, the so-called healthy aging, has been a matter of prime interest to humanity. It is widely held that the life expectancy is a function of interplay between various genetic and environmental factors. There is scientific evidence to support the fact that on

Visionary Talk with Dr Arvind Panagariya, Professor, Columbia University & Former VC, NITI Aayog



Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter