Debt conversion move triggers doubt


The issue of non-performing assets (NPAs) is confronting the financial sector, especially public sector banks (PSBs).

In the recent bi-monthly monetary policy review, Reserve Bank of India (RBI) Governor said the central bank would soon announce some measures to address financial restructuring of firms.

In the next few days, according to Dr. Rajan, the central bank would be able to announce two key relaxations — a move towards 5/25 restructuring for existing projects, which are standard; and allowing banks to take equity in restructuring to a great extent than they currently can.

“We are discussing the price at which such conversions can be done with the Securities and Exchange Board of India (SEBI) as of now,” RBI Governor had said about the key restructuring plan.

However, people in the know of things are sceptical about allowing banks to convert debt into equities.

A case in point is the conversion of Kingfisher Airlines’ debt into equity.

A consortium of 14 banks have around Rs.7,000 crore exposure to the defunct Kingfisher Airlines.Banks converted Kingfisher Airlines’ debt worth Rs.1,355 crore into equity at 61.6 per cent premium to the market price, which fetched them 23.21 per cent stake in the airline’s equity. In April, 2011, when the debt was converted into equity, the price of the stock was Rs.39.90.

On Friday, it closed at Rs.1.34 on the BSE. It is true that there is substantial financial stress in almost all sectors in the economy.

“We have been taking a holistic view instead of a sector by sector view, keeping in mind the need for flexibility in financial restructuring while limiting the extent of forbearance,” Dr. Rajan had said while announcing the monetary policy review.

However, the RBI governor warned several times against ‘window-dressing’ by PSBs. He even retorted that the central bank would not ‘bail out’ lenders for their bad policies and practices.

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Printable version | Jan 29, 2020 2:09:30 PM |

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