Banks and financial institutions are expecting a revival of their business, with the Securities and Exchange Board of India (SEBI) suggesting a pricing formula for the conversion of their debt (stressed assets) into equity.
The market regulator has relaxed the applicability of certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for this purpose.
“Primarily, this is a move to help industry in general as it will help revive businesses, which are undergoing severe financial stress,” said Walker Chandiok & Co partner Riaz Thingna. However, as far as banks were concerned, it would not help in any substantial manner except that their financial statements would be healthier to the extent that they would not be forced to treat the stressed assts as NPAs, he said.
“The challenge will be in valuation of such assets as there may be cases where conversions into equity may be justified given the business potentials, but the fair value works out less than the par value,” said Mr. Thingna.
The current minutes of the SEBI meeting indicate that conversions at less than par value will not be permitted.
Banks will convert debt into equity in such cases where the business potential reflects the reasonable chance of revival of business. “We hope that it not used to cloak bad or irrecoverable assets and needs to wait and see what protective provisions are introduced to monitor such conversions towards the desired objective,” Mr. Thingna added.
“It is a good move enabling banks to take over management from defaulting promoters,” said Finsec Law Advisors founder Sandeep Parekh.
The market regulator had provided for conversion at fair value or face value which is higher. “This may hamper banks’ ability to restructure the company,” Mr. Parekh felt.
The provision for conversion of debt into equity was even available now. But the major issue had been pricing, he said.
“In case of stressed assets, banks are taking a hit by way of reduction in interest rates and other sacrifices which should be compensated when the companies start doing well,” said IDBI Bank Executive Director R. K. Bansal. As SEBI stated, this would also provide more flexibility to the lending institutions to acquire control over the company, in the process of restructuring, “to the benefit of all the stakeholders.”
