RBI-Tough time for errant borrowers

Bankers will now be able to toss out errant promoters and grab majority control of companies that fail to pay back loans under the new debt recast rules notified today by the Reserve Bank of India.

The new rules that will effectively put bankers in charge of willful loan-defaulting companies form part of the strategic debt restructuring scheme (SDR) that was notified in February, which is underpinned by the general principle that “shareholders (should) bear the first loss rather than the debt holders”.

Under the new rules, lending banks will be able to hunker down and “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”.


This is an extreme step and will be taken when and if the loan defaulting company fails to achieve “viability milestones” that have been set out in the debt recast scheme. The lenders will do so only if they believe that a change in ownership will make the loan account viable.

The rules say that all lenders who form part of the joint lenders forum (JLF) “must collectively hold 51 per cent or more of the equity shares issued by the company”.

The option to convert loans into equity will be included in the strategic debt recast scheme for the defaulting company that will have to be supported by approvals and authorisations including the passing of a special resolution by the shareholders of the company.

The decision on invoking the SDR rules on loan to equity conversion will be taken by the lenders forming part of the JLF within 30 days of the review of the account.

The decision on conversion will have to be taken by a majority of the lenders: minimum of 75 per cent of the creditors by value and 60 per cent of creditors by number.

The big beef will be over the conversion price – and the scheme sets out two methods for the calculation of the fair value of the equity instrument.

In the case of listed companies, it will be based on the market value to be determined by the average of the closing prices of the instrument on a recognised stock exchange during 10 trading days preceding the reference date, which is the date on which the lenders decide to undertake the SDR.

The other method will be based on the break-up value, which will take into account the book value of the share based on the firms’s latest audited balance sheet which should not be more than a year old. “In case the latest balance sheet is not available, the break-up value shall be Re 1,” says the RBI notification.

According to credit rating agency Icra, stressed loans are likely to be in the region of Rs 7.4-8 trillion, or 10.5 per cent of bank loan, by the end of this fiscal. Gross non-performing assets are expected to rise to 5.9 per cent from 4.4 per cent as on March 31, 2015.

Sources said minority shareholders of such companies could also stand to benefit as a more efficient management or a promoter can come in because of the process. They, however, do not rule out the possibility of current promoters legally challenging any step by banks to change the ownership.

The provisions of the SDR would be applicable to accounts that have been restructured before the date of this circular, provided that the necessary enabling clauses are included in the agreement between the banks and borrower.

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