Both inefficient and unscrupulous promoters have had an easy and sheltered environment managing their businesses.
They borrow thousands of crores from banks. And when their companies turn sick — either due to their incompetence or deliberate diversion of funds — it is the banks that make substantial sacrifices and bear practically all the losses.
With the announcement of Strategic Debt Restructuring Scheme by the Reserve Bank of India, this scenario is likely to see a dramatic change.
A lot of public money that either goes down the drain or into the pockets of dishonest owners will now hopefully stop.
Of course, companies do face genuine problems and should be supported. And banks have been doing this for years under the Corporate Debt Restructuring Scheme. This typically involves increased moratorium on repayment of bank loans, a cut in the interest rates, conversion of loan into equity, additional bank facilities and more.
Unfortunately, however, in quite a few instances promoters have taken undue advantage of this debt restructuring process by passing on the maximum damage to the banks, while protecting their own wealth and financial interests.
Therefore, in line with the general principle of restructuring that shareholders should bear the risk rather than the lenders, RBI wants that promoters' own money should be at stake in any debt restructuring plan.
Thus, RBI has suggested that Joint Lenders' Forum (JLF) / Corporate Debt Restructuring (CDR) Cell should consider
- transfer of promoters' shareholding to the lenders
- promoters to bring in more equity capital into the company
- change in ownership or management control, if need be.
In this regards, loans (including the unpaid interest) would be converted into equity shares under a Strategic Debt Restructuring (SDR) scheme, whose salient features are detailed below.
1. While restructuring any loan, the JLF / CDR Cell will incorporate viability milestones and / or critical conditions into the scheme. Failure to achieve these would trigger the conversion of loans into equity and the lenders would acquire majority shareholding in the company, if it is felt that the change of ownership may revive the company.
2. SDR will apply even to earlier restructured loans if similar such provisions were part of the agreement.
3. Breach of viability milestones / critical conditions must to be immediately reviewed and decision to convert the loans into equity must be taken within 30 days of such review. This should have the approval of at least 75% of creditors by value and 60% of creditors by number.
4. The SDR approved conversion of debt into equity must be completed within a period of 90 days from the date of approval.
5. Upon such conversion, the lenders in the JLF must together hold 51% or more of the company's issued share capital.
6. Performance of such companies must be closely monitored and suitable professional management may be appointed to manage the affairs of the company.
7. Lenders should take appropriate steps to ensure that the shareholding in such cases is divested to the new promoters as soon as possible.
8. Upon divestment, the banks can reclassify these accounts as 'Standard', provided the 'new promoter' is not from the existing promoter group and it has acquired at least 51% stake in the company (or such applicable foreign investment limit if the new promoter is a non-resident).
9. Price at which the loans are to be converted into equity shares is very critical. In the past, banks have lost crores of their investment as the loan was converted at steep prices. Under SDR, the Fair Value at which loans would be converted into equity would not exceed lowest of the following:
i. Market Value : Average closing price during the 10 trading days prior to the date when JLR decides to go in for SDR
ii. Break-up Value : Book value as per the latest audited balance sheet (not more than one year old) after certain specified adjustments. In the absence of a balance sheet Re.1 would be taken as the break-up value.
10. Such acquisition of shares by the lenders and their pricing would be exempt from many of the relevant laws such as SEBI's Issue of Capital and Disclosure Requirements, obligation to make an Open Offer under Substantial Acquisition of Shares and Takeovers Regulations, regulatory ceilings / restrictions on Capital Market Exposures, requirement of periodic mark-to-market and the Guidelines on Compliance with Accounting Standards by Banks.
More often than not, it is not the absence of a suitable law but the lax implementation which is exploited by the corrupt businessmen. In this case too the enforcement would determine the success or failure of this initiative.
They borrow thousands of crores from banks. And when their companies turn sick — either due to their incompetence or deliberate diversion of funds — it is the banks that make substantial sacrifices and bear practically all the losses.
With the announcement of Strategic Debt Restructuring Scheme by the Reserve Bank of India, this scenario is likely to see a dramatic change.
A lot of public money that either goes down the drain or into the pockets of dishonest owners will now hopefully stop.
Of course, companies do face genuine problems and should be supported. And banks have been doing this for years under the Corporate Debt Restructuring Scheme. This typically involves increased moratorium on repayment of bank loans, a cut in the interest rates, conversion of loan into equity, additional bank facilities and more.
Unfortunately, however, in quite a few instances promoters have taken undue advantage of this debt restructuring process by passing on the maximum damage to the banks, while protecting their own wealth and financial interests.
Therefore, in line with the general principle of restructuring that shareholders should bear the risk rather than the lenders, RBI wants that promoters' own money should be at stake in any debt restructuring plan.
Thus, RBI has suggested that Joint Lenders' Forum (JLF) / Corporate Debt Restructuring (CDR) Cell should consider
- transfer of promoters' shareholding to the lenders
- promoters to bring in more equity capital into the company
- change in ownership or management control, if need be.
In this regards, loans (including the unpaid interest) would be converted into equity shares under a Strategic Debt Restructuring (SDR) scheme, whose salient features are detailed below.
1. While restructuring any loan, the JLF / CDR Cell will incorporate viability milestones and / or critical conditions into the scheme. Failure to achieve these would trigger the conversion of loans into equity and the lenders would acquire majority shareholding in the company, if it is felt that the change of ownership may revive the company.
2. SDR will apply even to earlier restructured loans if similar such provisions were part of the agreement.
3. Breach of viability milestones / critical conditions must to be immediately reviewed and decision to convert the loans into equity must be taken within 30 days of such review. This should have the approval of at least 75% of creditors by value and 60% of creditors by number.
4. The SDR approved conversion of debt into equity must be completed within a period of 90 days from the date of approval.
5. Upon such conversion, the lenders in the JLF must together hold 51% or more of the company's issued share capital.
6. Performance of such companies must be closely monitored and suitable professional management may be appointed to manage the affairs of the company.
7. Lenders should take appropriate steps to ensure that the shareholding in such cases is divested to the new promoters as soon as possible.
8. Upon divestment, the banks can reclassify these accounts as 'Standard', provided the 'new promoter' is not from the existing promoter group and it has acquired at least 51% stake in the company (or such applicable foreign investment limit if the new promoter is a non-resident).
9. Price at which the loans are to be converted into equity shares is very critical. In the past, banks have lost crores of their investment as the loan was converted at steep prices. Under SDR, the Fair Value at which loans would be converted into equity would not exceed lowest of the following:
i. Market Value : Average closing price during the 10 trading days prior to the date when JLR decides to go in for SDR
ii. Break-up Value : Book value as per the latest audited balance sheet (not more than one year old) after certain specified adjustments. In the absence of a balance sheet Re.1 would be taken as the break-up value.
10. Such acquisition of shares by the lenders and their pricing would be exempt from many of the relevant laws such as SEBI's Issue of Capital and Disclosure Requirements, obligation to make an Open Offer under Substantial Acquisition of Shares and Takeovers Regulations, regulatory ceilings / restrictions on Capital Market Exposures, requirement of periodic mark-to-market and the Guidelines on Compliance with Accounting Standards by Banks.
More often than not, it is not the absence of a suitable law but the lax implementation which is exploited by the corrupt businessmen. In this case too the enforcement would determine the success or failure of this initiative.
