As per these guidelines, the FIs will convert part of the company's debt into equity, which will raise their holdings in the company, ultimately bringing down the promoters' holding drastically.

The move is unlikely to find any takers as steel companies are likely to oppose it tooth and nail since the guidelines proposes a drastic reduction in the promoters' holding. Steel companies will shortly be meeting FIs to discuss this issue in detail.

The new guildelines have been formed on the basis of the recent debt restructuring proposal approved by the FIs for Jindal Vijajanagar Steel Ltd (JVSL). The plan envisaged a three-tier restructuring for JVSL's total debt of Rs 3,693 crore. The plan involved conversion of part of the debt (around Rs 563 crore) into equity, thereby hiking the FIs stake from the existing 8 per cent to 40 per cent.

Besides, an equivalent amount of the debt being converted into equity will be issued as preferential shares to the FIs. As regards the balance amount, the company proposes to bring down the interest to 14 per cent as against the weighted average cost of 18 per cent.

According to FI sources, the policy guidelines regarding debt restructuring of steel companies will be modelled on the lines of JVSL's three-tier restructuring strategy. The guidelines will serve as reference for steel companies which propose to restructure their debt to avoid default during down cycles in the steel market.

FI sources added that standard guidelines for steel companies is long pending, but a consensus among all companies is needed to finalise the policy framework.

Apparently, the conversion of debt into equity has been the bone of contention as most promoters are unwilling to dilute their equity holding.

The JVSL plan was a revised version of an earlier plan, whereby the company had asked for linking up the interest rate on the debt with the ruling steel prices. However, the FIs rejected the plan following which a new plan was proposed.