Asks banks to provide 15% of residual loan for debt-to-equity conversion
The Reserve Bank of India (RBI) on Thursday asked banks to provide at least 15% of their residual loan to a company while converting debt to equity under the strategic debt restructuring (SDR) norms, by the end of the 18-month period from the reference date.
The central bank said that it is possible that lenders may not be able to sell their stake to new promoters within 18 months thus revoking the stand-still classification benefit, resulting in sharp deterioration in the classification of their remaining loan exposures.
“The required provision should be made in equal installments over the four quarters,”it said, adding that the provision could be reversed only when all the outstanding loans in the account perform satisfactorily during the ‘specified period’ after transfer of ownership/management control to new promoters.
At present, equity shares acquired and held by banks under the scheme are exempt from the requirement of periodic mark-to-market. Noting that there is a possibility of banks facing a cliff-effect of provisioning at the end of the 18-month period on account of mark-to-market requirement or on account of recognising loss on sale of equity shares to the new promoters, RBI asked banks to periodically value and provide for depreciation of these equity shares as per IRAC norms for investment portfolio. “Banks will, however, have the option of distributing the depreciation on equity shares acquired under SDR, over a maximum of four calendar quarters from the date of conversion of debt into equity,” it said.
It has also allowed banks the asset classification benefit provided they divest a minimum of 26% of the shares of the company (from 51% earlier) to the new promoters within 18 months and the new promoters take over management control. “Lenders would thus have the option to exit their remaining holdings gradually, with upside as the company turns around. Lenders should, however, grant the new promoters the ‘Right of First Refusal’ for the subsequent divestment of their remaining stake,” it explained.
Currently, JLFs are required to adhere to certain prescribed timelines during the SDR process. The central bank has allowed JLFs flexibility in the time taken for completion of individual activities up to conversion of debt into equity in favour of lenders (up to 210 days from the review of achievement of milestones).
The central bank said that the pricing formula under SDR has been exempted from the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations subject to certain conditions.
Further, in the case of listed companies, the acquiring lender on account of conversion of debt into equity under SDR has also been exempted from the obligation to make an open offer. “Accordingly, it is clarified that the SDR framework will also be available to an ARC, which is a member of the JLF undertaking SDR of a borrower company,” it added.
Reviewing a separate guideline on joint lenders’ forum (JLF), RBI said that the proportion of lenders, by number, required for approving the corrective action plan (CAP) has been reduced to 50%. At present, decisions on the
corrective action plan (CAP) must be approved by a minimum of 75% of creditors by value and 60% of creditors by number in the JLF.
Rule of the game
* Reduction in the minimum percentage of shareholding to be initially divested by lenders
* Lenders to make provisions for possible loss in value of equity acquired in lieu of debt, residual loan exposures
* Extending asset classification benefits in otherwise eligible cases where fraudulent promoters are replaced by new ones
* Revised composition of the JLF-EG for enhancing the quality of decision making