Mumbai: Providing more teeth to lenders, RBI Monday allowed banks to take control of debt-laden companies by converting loans into equity, if a debt restructuring fails to revive them within a stipulated timeframe.
Capital markets regulator Sebi has already relaxed the norms for banks to take over the ownership of such companies under a new Strategic Debt Restructuring regime.
"With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may, at their discretion, undertake a 'Strategic Debt Restructuring (SDR)' by converting loan dues to equity shares...," RBI said in a notification.
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, it said.
In such cases, change of ownership will be a preferred option, it said, adding, the Joint Lenders' Forum (JLF) should actively consider such change in ownership.
As per the notification, "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."
This should be supported by necessary approvals including special resolution by the shareholders from the borrower company, as required under regulations, to enable the lenders to exercise the said option effectively, it said.
"Restructuring of loans without the said approvals for SDR is not permitted. If the borrower is not able to achieve the viability milestones and adhere to the ?critical conditions? referred to above, the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership," it said.
If found viable under such examination, the JLF may decide on whether to invoke the SDR, that is to convert the whole or part of the loan and interest outstanding into equity shares in the borrower company, so as to acquire majority shareholding in the company, RBI notification said.
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 till turnaround of company.
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.
The RBI further said that provisions of the SDR would also 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 decision on invoking the SDR by converting the whole or part of the loan into equity shares should be taken by the JLF as early as possible but within 30 days from the above review of the account, it said.
"Such decision should be well documented and approved by the majority of the JLF members (minimum of 75 percent of creditors by value and 60 percent of creditors by number)," it said.
In order to achieve the change in ownership, it said, the lenders under the JLF should collectively become the majority shareholder by conversion of their dues from the borrower into equity.
Post the conversion, all lenders under the JLF must collectively hold 51 percent 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, it said.
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, it said.
The notification further said that JLF and lenders should divest their holdings in the equity of the company as soon as possible.
On divestment of banks' holding in favour of a 'new promoter', the asset classification of the account may be upgraded to 'Standard', it said.
"However, it said, the quantum of provision held by the bank against the said account as on the date of divestment, which shall not be less than what was held as at the 'reference date', shall not be reversed," it said.
At the time of divestment of their holdings to a 'new promoter', banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as 'restructuring' subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance, it said.
