RBI proposes leveraged buyouts of stressed cos

Written by fe Bureau | Mumbai | Updated: Dec 18 2013, 09:42am hrs
In a discussion paper released on Tuesday, the Reserve Bank of India (RBI) has proposed to allow leveraged buyouts for specialised entities who want to acquire stressed companies from banks.

In terms of extant instructions, banks are generally not allowed to finance acquisition of promoter stake in Indian companies. The underlying reasoning being promoters should acquire equity stake from their own sources and not through borrowings, the paper states.

However, the paper now proposes to allow bank funding to specialised entities looking at buying out promoter stakes in companies under stress. However banks will have to ensure that these entities are well capitalised.

In case of projects where the repayment period is much shorter than the life cycle of the projects themselves, banks will be allowed to sell assets to other financial institutions who may then set their own repayment schedules, the paper stated. The central bank also intends to encourage more private equity and other third-party players to come up and purchase stressed accounts from banks, while allowing banks to fund such buyouts, senior RBI officials confirmed.

Furthermore, RBI intends to incentivise early sale of NPAs to asset reconstruction companies (ARCs). If banks were to make a profit on such a sale, they would be allowed to reverse the excess provisions to their profit and loss account as against the current norm.

If banks make a loss on such a sale, they will be allowed to amortise it over the next two years, provided they declare such losses in full. Such facilities, however, will be available for NPAs sold up to March 31, 2015, the discussion paper noted.

Banks using ARCs as a price discovery vehicle should be more transparent, including by disclosing the reserve price and specifying clauses for non-acceptance of bids. If a bid received is above the reserve price and also fulfils the other conditions specified, acceptance of that bid would be mandatory, the paper reads.

To improve liquidity and price discovery of stressed assets, RBI will also discuss allowing ARCs to trade such assets among themselves.

Similarly, RBI will also discuss the possibility of improving debt recovery tribunal (DRT) mechanism with the government. The paper discusses the possibility of allowing ex-bankers to take over as presiding officers at DRTs, while adding more benches at centres with large backlog of cases. A separate bench for speedy disposal of cases under Sarfaesi may be put up at DRTs as well.

RBI has stated in the paper that it aims to revitalise the framework of the corporate debt restructuring (CDR) cell by strengthening staff numbers and improving infrastructure.