India Inc will soon find it tougher to get bank loans restructured. Banks are planning to tighten the norms on corporate debt restructuring (CDR).

This move comes as some companies, whose promoters allegedly diverted bank loans to other businesses, have undermined the CDR mechanism by wangling liberal terms.

Though company promoters got interest rate concessions, loan repayments rescheduled, and debt converted into equity/preference shares, banks did not benefit from the restructuring.

At a meeting of lenders, called at the behest of the Finance Ministry, top bankers discussed proposals including seeking higher equity contribution from promoters and personal guarantee, and conversion of loans into equity shares at par for taking up loan restructuring proposals from India Inc.

The CDR mechanism came into existence in 2001 to restructure debts of viable corporate entities affected by internal and external factors. A cell floated by banks and financial institutions screens and implements all corporate loan restructuring proposals.

Banks want company promoters to upfront bring in up to 25 per cent of the amount that the former ‘sacrifice' by way of interest rate concession and extending the loan repayment period as their equity contribution to take the CDR proposal forward. Currently, the promoters' equity contribution is 15 per cent.

“In genuine cases, where a company is hit by external factors, the promoters' equity contribution could be relaxed to 15 per cent,” said a banker.

Besides equity contribution, company promoters have to give personal guarantee for the CDR to take effect. This will ensure that promoters are committed to the revival of their enterprises.

Conversion of debt into equity

Banks want the conversion of debt into equity at par and not at the formula (average of the past 26 weeks share price) prescribed by the markets regulator. For the concessions that banks make to turn around the fortunes of companies, bankers feel that at par conversion of debt into equity is in order.

“We will request the markets regulator to exempt the conversion of loans into equity from the prescribed formula,” said a bank official.


(This article was published on May 21, 2012)
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