The strategic debt restructuring (SDR) scheme has our approval and Sebi’s too, so lenders can now use it,” RBI governor Raghuram Rajan told FE in an interview on Wednesday.
The Reserve Bank of India (RBI) said banks can start using the strategic debt restructuring (SDR) scheme, which will allow them to acquire a 51% stake or more in stressed companies. The Securities and Exchange Board of India (Sebi) had given its nod to the scheme earlier this year, allowing banks to convert debt into equity at a price that was fair but not below the face value. “The scheme has our approval and Sebi’s too, so lenders can now use it,” RBI governor Raghuram Rajan told FE in an interview on Wednesday.
The SDR scheme is aimed at helping banks turn around companies that are faring badly, if necessary by initiating management changes. “Our sense is that in certain situations control might be beneficial in order to enable them to easily restructure the company and the management. Essentially you have got an in-built bankruptcy process that Sebi feels comfortable with and RBI feels comfortable with,” Rajan said.
While the new provisions do give banks more power, lenders are not too sure to what extent they will be able to use them. Some bankers point out it is not easy to convince experts or specialists to move into managerial roles in these sick companies. However, the central bank believes it could work. “This is where they either form partnerships or run auctions. It is not necessary that the bankers step into the shoes of the promoter. They could auction off stressed assets into the market,” the RBI governor explained.
The scheme will be applicable only to listed companies for the present and especially those that fail to reach viability milestones under the corporate debt restructuring (CDR) or joint lenders’ forum (JLF) schemes. Loans of lenders in the consortium will be converted into equity — including those of non-banking financial institutions — and the lenders collectively will hold 51% or more of the equity stake, resulting in a change in management or a change in control.
Banks are concerned that if they hold a 51% stake the company would become a public sector enterprise and subject to CAG audits and CVC scrutiny.
“This would affect smooth operations of the company,” a senior banker explained to FE. Bankers believe the best way out would be for them to hold a majority stake, higher than that of the promoter, so that they can control the board and influence decision-making.
One of the problems of the SDR scheme was the price at which the equity conversion should take place. Sebi notes that the conversion price, determined under the extant Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR) — may be substantially higher than the current market price, resulting in substantial loss to the lenders, especially as share value of stressed companies fall. While Sebi said that ICDR will not be applicable to SDR and that conversion shall not be at a price less than face value even if the fair value of shares of the company is lower, it still has left the formulation of “fair value” to be determined by the banking regulator. The RBI believes the SDR scheme could be beneficial for the shareholder as it allows management deficiencies to be corrected, not always possible today, because the promoter can essentially refuse.