The Reserve Bank of India (RBI) has empowered lending banks to also consider change in ownership of borrowing companies, which have been through a debt restructuring process.
In a circular to banks, the RBI said, “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/managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be a preferred option." And, it has suggested that the joint lenders’ forum (JLF) should actively consider a change in ownership under the framework for revitalising distressed accounts in the economy, issued in February 2014.
The RBI wants lending banks to incorporate a clause at the time of debt revamp itself that allows them to covert loans into equity if a borrower fails to adhere to set visibility milestones. |
Apex bank has made it clear that the JLF should approve the debt conversion package within 90 days from the date of deciding to undertake the SDR. |
Equity shares acquired and held by banks under SDR scheme will be exempt from the requirement of periodic mark-to-market prudential norms for a specified period. |
The February 2014 guidelines talked about change of management vis-à-vis stressed accounts. However, it emphasised that the “shareholders bear the first loss than the debt-holders." With this priority and also to ensure more skin in the game of promoters, a set of possible options were envisaged which include, among others, transferring equity to lenders, promoter infusing more funds, and transfer of promoter holding to a trustee or an escrow arrangement till turnaround of the company.
With a view to ensuring more stake of promoters in reviving stressed assets and also providing banks with increased capabilities to initiate change of ownership in accounts which fail to achieve the projected milestone, the apex bank has empowered lending banks to undertake “a strategic debt restructuring’’ (SDR) by converting loan dues into equity shares.
The RBI wants lending banks to incorporate a clause at the time of debt revamp itself that allows them to covert loans into equity if a borrower fails to adhere to set visibility milestones. In such instance, the joint lenders’ forum (JLF) “must immediately examine whether the account will be viable by effecting a change in ownership,’’ the RBI said. In that event, JLF could invoke SDR. The apex bank has said the provisions of the SDR will be applicable to accounts which have been restructured ‘before the date of this circular’. A decision on invoking SDR should be taken within 30 days from the review of the account concerned. “Such decisions should be well documented and approved by majority of the JLF members (minimum 75 per of creditors by value and 60 per cent of creditors by numbers),’’ the RBI said.
The apex bank has detailed the process of debt conversion into equity. Also, it has made it clear that the JLF should approve the debt conversion package within 90 days from the date of deciding to undertake the SDR. The invocation of SDR ``will not be treated as restructuring for the purpose of asset classification and provisioning norms,’’ the RBI said. The RBI has also elaborated on the asset classification and its treatment once banks divest their holdings in favour of a new promoter.
Equity shares acquired and held by banks under SDR scheme will be exempt from the requirement of periodic mark-to-market prudential norms for a specified period. Also, equity holding through such conversion of debt “may not be treated as investment in associate", the apex bank has clarified.
Sets terms to spot 'new promoter’
The RBI has also laid out terms for banks in identifying new promoters. The ‘new promoter’ should not be a person/entity/subsidiary/associate etc. (domestic as well as overseas) from the existing promoter/promoter group. Banks should clearly establish that the acquirer does not belong to the existing promoter group, it has made it clear.
“The new promoters should have acquired at least 51 per cent of the paid-up equity capital of the borrower company. If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter should own at least 26 per cent of the paid-up equity capital or up to applicable foreign investment limit, whichever is higher, provided banks are satisfied that with this equity stake the new non-resident promoter controls the management of the company," the RBI has further said.
