Corporate default: Sebi revamps debt conversion norms for banks
To help lenders deal with defaulting borrowers, Sebi has notified new norms for banks to convert their debt into equity in distressed companies, a move that may lead to a sharp rise in restructuring of bank loans. The decision to tweak the pricing formula for conversion of debt into equity would also pave the way for bankers to have a larger say in activities of a distressed company by acquiring majority stake and taking over the management.
The total non-performing assets of the public sector banks stand at nearly Rs 3 lakh crore, while top 30 defaulters are sitting on bad loans worth Rs 95,122 crore as of December-end. In the past, banks have converted bad debt into equity in a few cases like Kingfisher, but the conversion has been mostly difficult due to regulatory and legal issues.
Acquisition of equity shares by the consortium of banks, financial institutions and other secured lenders pursuant to conversion of their debt as part of the Strategic Debt Restructuring Scheme will be in accordance with the guidelines specified by the Reserve Bank, Sebi said. At present, banks can convert debt into equity in cases of bad loans, but there have been regulatory issues with regard to distressed listed companies. The new pricing formula have simplified this procedure. With the changed norms, pricing would be based on “fair value” with some safeguards and conversion into equity can only happen when the lenders have acquired at least 51 per cent stake in the concerned company. The relaxation in terms of pricing would be subject to the allotment price as per a fair price formula prescribed and not less than the face value of shares. The conversion price need to be certified by two independent qualified valuers.
Equity shares allotted would be locked in for one year from the date of trading approval, in case “consortium of banks and financial institutions may transfer their shareholding to an entity before completion of the lock-in period subject to continuation of the lock-in on such shares for the remaining period with the transferee.” “The provisions of this Chapter shall not apply when any other secured lenders opt to join the strategic debt restructuring scheme,” Securities and Exchange Board of India (Sebi) noted. Other requirements would be available if conversions are undertaken as part of proposed Strategic Debt Restructuring scheme of Reserve Bank. Earlier in March, Sebi’s board had approved the decision to ease debt conversion norms for banks in distressed companies.