The Hindu Business Line : 5 pc exposure cap — Banks seek waiver of debt-converted equity

BANKS have sought exemption of `debt-converted equity' under the Corporate Debt Restructuring (CDR) scheme from their equity exposure limit of five per cent.

The core group of the CDR arrangement has submitted a recommendation to the Reserve Bank of India on the issue and also taken it up with the Indian Banks' Association. It also recommended that the case-by-case scrutiny and permission by the apex bank in this regard be done away with, said banking sources.

In May 2001, in the wake of the stock market scam, the central bank capped banks' total equity investments - by way of bank's direct investments in shares, equity-oriented mutual funds, convertible bonds and debentures, IPO financing, advances to individuals/brokers for investment in equity shares — at 5 per cent of the total outstanding advances of the previous fiscal.

While financial institutions, not bound by the rules of the apex bank, such as the Industrial Development Bank of India, Life Insurance Corporation and General Insurance Corporation have benefited greatly from conversion of debt into equity in several companies, banks have largely shied away from the proposition. This is possibly because banks are required to take a case-by-case approval from the RBI in order to do so and while doing so they also have to closely monitor their level of equity investments and ensure that it falls within the permitted limit, said sources.

The benefit of conversion of bad debt in a company into equity is that the lenders on holding a substantial stake would have management control in the entity which can go a long way in reviving the unit. Since conversion is done only in the case of listed companies, the bank/FI can liquidate its holdings when prices go up, explained a banker. Instead, the option that is currently exercised by most banks is to sacrifice the loan, provision for the same from profits and wait for the borrower to repay.

The CDR group is an arrangement initiated by the Reserve Bank; it consists of public and private banks and financial institutions with the mandate to revive cases of bad debt through consensus arrangement across lenders.

The group takes up large non-performing cases or loans that are on the verge of slippage and tries to revive the account either through waiver of interest amount of the loan, conversion of debt into equity or additional funding.

The group has revived 30 out of the 63 cases it had been working on. Among the 30 revived cases, many of which are even eligible for fresh bank loans, are big fish, the likes of Jindal Steel, Essar Steel, Ispat Industries, Gujarat Alkalies and United Phosphorus. The ongoing economic recovery in the country is believed to have facilitated in reviving many of the sick units, said a banker, since demand has kicked up in various sectors leading to increased cash flows and ability to repay loans.

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