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The Securities and Exchange Board of India (SEBI) has relaxed norms for conversion of the distressed loans of listed companies into equity by banks and financial institutions.
The market regulator’s move will allow lenders, particularly public sector banks, which are staring at a 10-year high in bad debts, to reduce the pressure on their balance sheets.
In its board meeting on Sunday, SEBI decided to adopt a fair price mechanism for conversion in place of the current market pricing formula. The regulator hopes that with the new system, there will be more corporate debt restructuring.
Bad debts or non-performing assets of all public sector banks rose to 5.64 per cent of advances at the end of December 2014, which is the highest after the 5.73 per cent recorded in 2004-05.
Fair value “SEBI will prescribe how the fair value will be decided. There is one comfort that if the fair value is below the face value, at least the face value has to be given,” Sinha told reporters after the board meeting.
The new rule will be applied only when banks acquire at least 51 per cent of the equity.
“Banks (secured creditors) should come together to form, what is called a joint lender forum. Not only banks, even non-banking finance companies can be members of the forum,” he said. The Reserve Bank of India will also come out with detailed guidelines. SEBI expects great demand for restructuring of bank loans. “Either promoters of companies will bring money from some source and pay up the debt, or bankers will be in a position to take over management,” he said, adding that this is a major point pending with the larger issue of a bankruptcy code.
The relaxation of pricing will be subject to the allotment price being decided as per a fair price formula, which is not less than the face value of shares. The other requirements will be applicable if conversions are done as part of the RBI’s proposed Strategic Debt Restructuring scheme.
“This is intended to revive distressed listed companies and provide more flexibility to lending institutions to acquire control of a company in the process of restructuring, to the benefit of all stakeholders,” SEBI said.
Currently, banks can convert debt into equity in case of bad loans but there are regulatory issues with regard to distressed listed companies.
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