Banks get RBI nod to take over debt-laden companies

The Reserve Bank of India (RBI) announced fresh guidelines on Monday to enable commercial banks to acquire a majority stake in companies that are unable to repay loans and come under the strategic debt restructuring (SDR) scheme.

The measures aim to provide banks a more flexible process to recover bad loans, which have been mounting in recent months.

According to the guidelines, banks that decide to recast a company's debt under the SDR scheme must hold 51 per cent or more of the equity after the debt-for-share conversion. Banks will also be allowed to convert debt to equity within 30 days of the review of the company's accounts.

"In addition, lenders who acquire shares of a listed company under a restructuring will be exempted from making an open offer, as per rules from the Securities and Exchange Board of India (Sebi)", RBI said.

"Provisions of the SDR would also be applicable to accounts which have been restructured before the date of this circular provided that necessary enabling clauses, as indicated in the above paragraph, are included in the agreement between the banks and borrower", RBI said.
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These restructuring norms will also apply to all company accounts before Monday", the RBI added.

The circular is part of the RBI objective to revitalise distressed assets and the guidelines on joint lenders' forum (JLF) and corrective action plan envisage a change of management as a part of restructuring of stressed assets.

The RBI circular, issued to all banks, states that the general principle of restructuring should be that shareholders bear the first loss rather than debt holders.

With this principle in view and also to ensure more 'skin in the game' of promoters, JLF or the corporate debt restructuring cell (CDR) may consider the possibility of transferring equity of the company by promoters to lenders to compensate for their sacrifices.

Promoters must also consider infusing more equity into their companies.

Banks will also have to consider the option of transferring promoters' holdings to a security trustee or an escrow arrangement till turnaround of company.

This will enable a change in management control should lenders favour it. The RBI circular further states that it has been observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational or managerial inefficiencies despite substantial sacrifices made by lending banks.

In such cases, change of ownership will be a preferred option. Henceforth, the JLF should actively consider such change in ownership.