Easier for banks to take control of distressed companies - Times of India

The author has posted comments on this articleMayur Shetty, TNN | Mar 23, 2015, 06.00AM IST

MUMBAI: Banks will soon have a free hand in taking control of distressed companies. The Securities and Exchange Board of India (Sebi) has conceded to the Reserve Bank of India's (RBI's) proposal that banks be exempt from the market regulator's norms on pricing of shares while converting debt into equity in defaulting companies.

Sebi's 'Issue of Capital and Disclosure ICDR' guidelines require that companies make preferential issues based on a six-monthly average price and not the immediate market price. The objective of the norms was to ensure that minority shareholders are not given a raw deal by managements by issuing preferential shares when stock prices are low.

The hurdle faced by banks in converting debt of distressed companies into equity came to the fore in 2011 when lenders converted Rs 1,400 crore worth of loans advanced to the Kingfisher Airlines into equity at a price of Rs 64.48 per share against the prevailing market price of Rs 39.90. The pricing difference was because the conversion was subject to Sebi's floor price formula, which applied to the banks and the promoters. Banks were roundly criticized for the conversion, which was part of the restructuring package aimed at reducing debt of the company.

"The new norms will be fair to both minority shareholders as well as lenders," said a source. One of the first measures taken by RBI governor Raghuram Rajan was to announce a series of initiatives to tackle bad loans in the banking system. One measure was to create a central registry in the RBI, which would maintain information on distressed borrowers so that banks could take pre-emptive action before loans turned completely bad.

Bankers say that until the '90s, before liberalization and financial sector reforms, there was a clause in every loan agreement that enabled development finance institutions to convert their debt into shares of the company at par. This reduced risk of wilful default to a minimum. Also, since institutions were government controlled there was not much misuse of this condition.

Bankers say that conversion of debt into equity will enable them to bring about a change in management. "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures," Rajan had told reporters soon after taking charge in 2013.

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