Mumbai: In the absence of general guidelines from the Reserve Bank of India (RBI), State Bank of India (SBI), on behalf of the lenders’ consortium, has sought special permission from the central bank for conversion of debt into equity in Jet Airways (India) Ltd. This comes after the Supreme Court quashed the RBI’s 12 February circular allowing such conversions in companies with negative net worth.
SBI, on behalf of the lenders’ consortium, had earlier proposed to convert the airline’s debt into equity for a notional value of ₹1 for a 51% stake in the distressed company.
This move was based on RBI’s circular which the Supreme Court declared ultra vires.
SBI is yet to go ahead with the conversion as it is awaiting revised guidelines from RBI.
Queries emailed to SBI were unanswered.
“We will convert debt into equity only if the bidders want to pick up 75% stake in the company. As of now, the lenders can sell only 32% of the airline shares that are pledged with them," said a banker aware of the development. “However, we have sought special permission from the central bank for converting the existing debt into equity to meet the difference."
On Wednesday, banks rejected Jet Airways’ proposal for emergency funding of ₹400 crore, resulting in its grounding.
The interim funding was supposed to help the airline keep at least some of its planes flying till the lenders found a buyer. Lenders, however, felt that they could not put in additional funds unless there was some clarity on cash flows.
The proposal for emergency funding and picking up a 51% stake in the airline was part of the resolution plan put forth by lenders.
In March, lenders committed to infuse ₹1,500 crore, conditional on promoter Naresh Goyal resigning from the board. Even with Goyal’s exit, however, the lenders still did not release the promised additional funds.
The resolution plan to turn around the airline is currently in abeyance as a bidding process is underway.
Earlier this week, banks shortlisted four investors—Etihad Airways PJSC, the National Investment and Infrastructure Fund, and private equity firms Indigo Partners and TPG Capital—for submitting binding bids.
“RBI should not mandate conversion of debt which will go against the 12 February circular which offered a lot of flexibility in restructuring. Price of conversion should be based on an objective and fair value. If you define a price based on net worth, that price will be questioned. So best to leave it to the shortlisted valuers," said Abizer Diwanji, national leader of financial services and restructuring at EY India
Typically, RBI avoids giving any special approval to banks seeking relaxation for distressed companies.
RBI governor Shaktikanta Das said after the first bi-monthly monetary policy of fiscal year 2020 that the central bank will issue a revised circular for quick and effective resolution of stressed assets.
Banks, through the Indian Banks’ Association, have requested RBI to allow creditors to approve a resolution plan even if they have only 90% consensus, against the required 100% now. They also want the central bank to increase the default period from one day to 30 days before the restructuring process kicks in.