BackBanks get RBI approval to take control if debt restructuring fails
RBI says 'strategic debt restructuring' exercise will ensure promoters are more involved in turning around a debt-laden company
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Mumbai: The Reserve Bank of India (RBI) allowed banks to seize control of a company if a debt recast fails, supplant the management, and sell their stake in the defaulting company as soon as possible to recover dues, in one of the central bank’s most aggressive steps to rein in wilful defaulters and curb rising bad loans.
This ‘strategic debt restructuring’ (SDR) exercise of converting loan dues to shares will ensure that promoters are more involved in turning around a company and will help banks reduce bad assets, RBI said on Monday.
The central bank, under governor Raghuram Rajan, is taking steps to empower lenders to recover money from defaulters who have burdened the Indian financial system. Rajan has termed wilful defaulters as freeloaders and said such borrowers have continuously eroded the sanctity of a debt contract.
The measures will ensure that promoters of companies do not take the banking system for granted, as the owners may end up losing control, said a State Bank of India official.
“This was a long-standing demand by the banking industry. And by allowing banks to exercise more control, RBI has sent out a stern message to companies to take restructuring seriously," said the official who did not wish to be named.
The new rules may help banks lessen their load of high provisioning as once banks manage to sell their stake fully in the defaulting company, the money set aside by the lenders to cover bad loans can be written back.
But before seizing control of a defaulting company, lenders will have to find professional management to run the company and see to it that it is making good on its repayment obligations to banks, the central bank said.
Capital markets regulator Securities and Exchange Board of India (Sebi) allowed conversion of loans to shares on 22 March. With RBI now formalizing the proposal, banks will get more teeth in recovering their dues.
Some bankers and experts remain sceptical about the new rules, terming them impractical.
“Right now this is a threat mechanism. The intent is good, but delivery is a challenge," said Nirmal Gangwal, chief executive officer, Brescon Corporate Advisors Pvt. Ltd, a firm that specializes in guiding distressed companies. “At this point, this seems to be impractical to implement in most cases. First, mere conversion to equity means you will own all the skeletons in the cupboard. Banks don’t have the in-depth knowledge of how things function in a company. Second, markets are very illiquid in India."
Bankers said it would only make sense to take control of a company if it holds some value and where new buyers have already been found. “Or else banks will be left with a list of companies which are non-performing and don’t have a professional management to make decisions," said a senior banker with a state-owned bank, requesting anonymity.
While RBI’s latest norms are for new loan recasts, where it is mandatory to agree if SDR will be done or not, old restructuring exercises where such clauses have already been inserted can be enforced under the new norms, the central bank said.
At the time of fresh debt restructuring, banks will insert a clause specifying whether the entire loan, or a part of it, can be converted into equity in favour of the lenders, if the borrower fails to achieve certain milestones.
Such milestones, too, should be specified in the restructuring package during the formation of a joint lenders’ forum (JLF), RBI said on its website. In a JLF, lenders of a stressed account meet to decide on how to recover the loan. If all else fails, the account is often referred to the corporate debt restructuring (CDR) cell.
“After the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company," the RBI circular said.
If the company is listed, the buyer of the shares under the SDR scheme will be exempted from the obligation to make an open offer.
If the borrower fails to meet the milestones specified at the time of restructuring, “the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership", RBI said, adding that the JLF may then decide on whether to invoke the SDR, which will convert the whole or part of the loan and interest outstanding into equity shares in the borrower company, so as to acquire majority shareholding in the company.
At least 75% of creditors by value and 60% of creditors by number have to agree to such a strategic management change and a decision has to be taken by the lenders within 30 days of the review of the account.
“Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company," RBI said, adding that the invocation of SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms.
Banks will also have to closely monitor the performance of the company. At the same time, the banks themselves should try and sell their stake “as soon as possible", the RBI circular said.
As and when the equity is transferred to a new owner, the banks can upgrade the loan category to ‘standard’ from ‘stressed’ account. However, the lenders will continue to carry the existing provisions as long as they have exposure to the account, and as long the account is stressed in its repayment obligation. Alternatively, if the banks manage to exit the company completely, they can write back the existing provision in their books.
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