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MUMBAI, March 22

SCHEDULED commercial banks have been given more leeway in financing public sector disinvestments.

It has been decided that banks, while deciding to extend finance to borrowers who participate in the disinvestment programme, need not obtain approval from regulatory bodies regarding the disposal of the shares acquired. In turn the onus has been passed on to the borrowers themselves to procure the requisite approvals.

In a circular today, the Reserve Bank has asked banks to advise the borrowers to execute an agreement whereby they undertake to produce the letter of waiver by the Government for disposal of shares acquired under PSU disinvestment programme during the lock-in period.

Or else they should include a specific provision in the documentation with the Government permitting the pledgee to liquidate the shares during the lock-in period, in case of shortfall in margin requirement or default by the borrower.

The relaxation follows a review of the existing guidelines by the Reserve Bank in consultation with the Government of India. Previously, banks in order to provide finance were required to obtain approval from Government of India and other regulatory agencies to waive restrictions on the PSU equity holdings. This is in the case of the PSU disinvestment shares, which are illiquid due to lock-in period/restrictive clauses.

Banks may extend finance to the successful bidders even though the shares of the disinvested company acquired/to be acquired by the successful bidder are subjected to a lock-in period/other such restrictions which affect their liquidity, subject to fulfilment of the following conditions.

These include, the documentation between the Government of India and the successful bidder should contain a specific provision permitting the pledgee to liquidate the shares even during lock-in period that may be prescribed in respect of such disinvestments, in case of shortfall in margin requirements or default by the borrower.

The other condition prescribes that the documentation does not contain such a specific provision, the borrower (successful bidder) should obtain waiver from the Government for disposal of shares acquired under PSU disinvestment programme during the lock-in period.

As per the terms and conditions of the PSU disinvestments by the Government of India, the pledgee bank will not be allowed to invoke the pledge during the first year of the lock-in period.

During the second and third year of the lock-in period, in case of inability of the borrower to restore the margin prescribed for the purpose by way of additional security or non performance of the payment obligations as per the repayment schedule agreed upon between the bank and the borrower, bank would have the right to invoke the pledge. The pledgee bank's right to invoke the pledge during the second and third years of the lock-in period, would be subject to the terms and conditions of the documentation between Government and the successful bidder, which might also cast certain responsibilities on the pledgee banks.

Special purpose vehicles (SPVs), which comply certain conditions, would be eligible for getting banks finance for acquiring PSU shares. These SPVs should not be treated as NBFCs, which are not eligible for bank finance.

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