RBI relaxes change in ownership norms

The Reserve Bank of India (RBI) has notified norms that allow banks to upgrade credit facilities extended to borrowing entities upon a change in ownership, so long as the ownership has been changed outside ‘Strategic Debt Restructuring Scheme’.

The decision will give banks more flexibility to bring in a change in ownership of borrowing entities which are under stress, RBI said in a notification to all banks.

The move would “further enhance banks’ ability to bring in a change in ownership of borrowing entities which are under stress primarily due to operational/ managerial inefficiencies despite substantial sacrifices made by the lending banks,” the central bank observed.

However, RBI said the ‘new promoter’ should not be a person/entity/subsidiary/associate etc. (domestic as well as overseas), from/belonging to the existing promoter/promoter group.

“Banks should clearly establish that the acquirer does not belong to the existing promoter group,” it said in the notification.

Further, it said that the new promoter should have acquired at least 51 per cent of the paid up equity capital of the borrower company.

RBI also said that “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.”

Banks should also be satisfied that with this equity stake the new non-resident promoter controls the management of the company, RBI stipulated.

At the time of takeover of the borrowing entity by a ‘new promoter’, banks are allowed to refinance the existing debt of the borrowing entities, considering the changed risk profile, without treating the exercise as ‘restructuring’.

RBI also said that provisions held against the said account can be reversed if the outstanding loan/facilities of the borrowing entities perform satisfactorily during the ‘specified period’.