RBI allows banks to take over ownership of stressed firms
9 Jun 2015 12:50 AM GMT
Providing more teeth to lenders, RBI on Monday allowed banks to take control of debt-laden companies by converting loans into <g data-gr-id="18">equity,</g> if a debt restructuring fails to revive them within a stipulated timeframe. Capital markets regulator Sebi has already relaxed the norms for banks to take over the ownership of such companies under a new Strategic Debt Restructuring regime.
"With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may, at their discretion, undertake a Strategic Debt Restructuring (SDR) by converting loan dues to equity shares...," RBI said in a notification.
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 the lending banks, it said. In such cases, change of ownership will be a preferred option, it said, adding, the Joint Lenders Forum (JLF) should actively consider such change in ownership.
As per the notification, "at the time of initial restructuring, the JLF must incorporate, in the terms and conditions attached to the restructured loans agreed with the borrower, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones and/or adhere to ?critical conditions? as stipulated in the restructuring package."
This should be supported by necessary approvals including <g data-gr-id="21">special</g> resolution by the shareholders from the borrower company, as required under regulations, to enable the lenders to exercise the said option effectively, it said."Restructuring of loans without the said approvals for SDR is not permitted. If the borrower is not able to achieve the viability milestones and adhere to the critical conditions referred to above, the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership," it said.
Central Bank blames regulatory vacuum for <g data-gr-id="53">ponzi</g> schemes
With growing incidents of <g data-gr-id="64">ponzi</g> schemes defrauding millions of gullible investors, the Reserve Bank on Monday blamed regulatory vacuum and lack of coordination among various watchdog and investigative agencies for them. Ponzi schemes are fraudulent investment schemes, wherein people are promised high returns without having to assume <g data-gr-id="66">commensurate</g> level of risks.
“One important thing we have seen in recent deliberations is that many <g data-gr-id="61">ponzi</g> schemes are falling under a regulatory vacuum, as there is no clarity on whose regulatory turf it falls in, <g data-gr-id="63">and therefore</g> remains a grey area,” said RBI deputy governor SS Mundra. He also partly blamed the institution-specific regulations in the country for it rather than the activity-based regulation as prevalent in other nations.
“This leaves the scope of some activities falling on the fringe, to be left out of the regulatory radar,” Mundra said, adding that because enforcement agencies do not see the problem until it becomes an issue and the number of complaints <g data-gr-id="55">increase</g>.
Even if such unauthorised activities come to the fore, lack of coordinated efforts from various investigative agencies and protected legal proceedings fail to create enough deterrence for the fraudsters or the potential fraudsters, Mundra added.
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