Lenders, who converted a part of their loans into equity shares in companies which defaulted on interest payment, have taken a hit as these companies? market value has fallen, making such moves risky.

IFCI had converted R250 crore loan into equity shares and owns 18.42% stake in India’s largest independently run telecom tower company, GTL Infrastructure, while India’s second largest lender by assets, ICICI Bank, had converted some of its loans in debt-ridden Kingfisher Airlines and owns roughly 23% stake.

GTL has lost 85% of its value to R373 crore from R2,660.75 crore and its share price fell by same percentage to R38.35 from R258.

ICICI Bank, which converted the shares at R62 a piece, lost two-thirds of its value, as Kingfisher?s price tanked to R24.95 on Friday on the Bombay Stock Exchange. The second largest passenger carrier by market share lost 26% of its value after the conversion, to R1,241.96 crore.

Debt-ridden GTL Infrastructure will undergo corporate debt restructuring, where a consortium of lenders will finalise a financial package to revive the company from bankruptcy. Lenders allow companies to defer principal loan repayment for a period

and add some of the pending interest to the principal loan to save it from being categorised as non-performing assets (NPAs).

Kingfisher Airlines has also asked SBI Caps, the merchant banking arm of the country’s largest lender, State Bank of India (SBI), for a debt recast.

Lenders had earlier converted loans into equity shares on a par and sold at profit. But now, companies can issue shares under the Securities Exchange Board of India (Sebi) guidelines. The issue price is calculated by taking the 26 weeks’ average price or two weeks’ average price traded on the stock exchange.

The regulator had issued the guidelines to protect minority shareholders.

?It is risky to convert loans into equity shares as it can go either way?gain or loss,? says a former managing director of a bank. Lenders have the right to convert loans into equity shares of defaulters if the company is unable to repay even after the remedial period of 90 days over and above the 90 days’ interest payment cycle.

They also include a certain compensation in the form of equity shares in the loan agreement if the company defaults on payment.

In 2000, some companies like JSW Steel had issued shares to its lenders after they defaulted on loans as steel makers sold steel below production cost. ?We reaped profits from it,? said the official.

Lenders also have the choice to convert loans to shares and sell them to a new buyer. Lenders sold their stake in Ispat Industries to JSW Steel after the Pramod Mittal-owned company failed to repay interest on time.

?Lenders lose the security value for a part of the loan converted to shares on assets,? says another banker who headed the CDR cell of a bank. ?They should seek equity shares as a recompense, which means the lenders get shares in future for compensation of any interest losses.? But bankers take solace in not losing money as original shareholders. ?As lender shareholders, we will not lose money as original shareholders when loans are converted to equity shares,? Pratip Chaudhuri, SBI chairman, said in an interaction with the media last week.