Tuesday, August 18, 2015

REVITALISING DISTRESSED ASSETS IN THE ECONOMY

       
Part C              


C-1 : Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders 

Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)

These guidelines will be applicable for lending under Consortium and Multiple Banking Arrangements (MBA), and should be read with prudential norms on ‘Restructuring of Advances”.

Formation of Joint Lenders’ Forum

Before the account turns NPA, banks are required to identify incipient stress in the account by creating three sub-categories as given below: (applicable in all cases of lending)
Sub- categories
Basis for classification
SMA-0
Overdue upto 30 days but with  signs of incipient stress
SMA-1
Overdue between 31-60 days
SMA-2
Overdue between 61-90 days

Banks will be required to report credit information, including classification of an account as SMA to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs.50 million and above. Crop loans, interbank exposures including exposures to NABARD, SIDBI, EXIM Bank and NHB are exempted from reporting.

Applicability of the Framework in Certain Cases:
Banks must report their CC and OD accounts, including overdraft arising out of devolved LCs/invoked guarantees to CRILC as SMA 2 if:
a)      the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 60 days; and/or
b)      in  cases  where  the  outstanding  balance in  the  principal operating account is less than   the   sanctioned   limit/drawing power,   but there are   no credits continuously for  60  days or  credits are not  enough  to cover the interest debited during the same period,

Bills purchased or discounted (except those backed by LCs issued by banks) and derivative exposures with receivables representing positive mark to market value remaining overdue for more than 60 days should be reported to CRILC as SMA-2.

Banks should report on loans extended by their overseas branches. However, formation of JLF will not be mandatory in cases of offshore borrowers which do not have any presence in India. The inclusion of offshore lenders as part of JLF shall not be mandatory. It is clarified that formation of JLF will not be mandatory on reporting of investment portfolio as SMA, except in cases of bonds/debentures acquired on private placement basis or due to conversion of debt under restructuring of advances.

Banks will be permitted to report their SMA-2 accounts and JLF formations on a weekly basis at the close of business on every Friday or on the preceding working day of the week if Friday happens to be a holiday.

As soon as an account is reported to CRILC as SMA-2, it becomes mandatory for the bank to form JLF if the aggregate exposure (AE) is Rs 1000 million and above. Lenders may also form a JLF even when the AE is less than Rs.1000 million or when the account is reported as SMA-0 or SMA-1.

The existing Consortium will serve as JLF with the Consortium Leader as convener. For accounts under Multiple Banking Arrangements (MBA), the lender with the highest AE will convene JLF and facilitate exchange of credit information. In case there are multiple consortium of lenders, the lender with the highest AE will convene the JLF.

When a request is received from the borrower for the formation of a JLF due to imminent stress, the account should be reported to CRILC as SMA-0 and the JLF should be formed immediately if the AE is Rs. 1000 million and above.

All the lenders should sign an Agreement incorporating the broad rules for the functioning of the JLF. IBA has prepared a Master JLF agreement and operational guidelines for JLF. The JLF may invite representatives of the Central/State Government/Project authorities/Local authorities, if they have a role in the implementation of the project financed.


Corrective Action Plan (CAP) by JLF
(CAP) by the JLF would generally include:
(a)    Rectification - Obtaining a specific commitment from the borrower to regularise the account supported with identifiable cash flows without involving any loss or sacrifice. If the promoters are unable to regularise the account, the possibility of getting other investors may be explored. These measures aimed at turning around the business should not bring about any change in the existing terms and conditions of the loan. The JLF may also consider providing additional finance.

(b)   Restructuring - Consider restructuring if found viable and the borrower is not a wilful defaulter. Obtain a commitment from promoters for extending personal guarantees along with their net worth statement. This should be supported by copies of legal titles to assets and a declaration that such assets will not be alienated without the permission of the JLF. Any deviation may initiate recovery process. The lenders and borrowers may sign an Inter Creditor Agreement (ICA) and the Debtor Creditor Agreement (DCA). A ‘stand still’7 clause could be stipulated in the DCA. The ‘stand-still’ clause does not mean that the borrower is precluded from making payments to the lenders.

Stand Still Clause:
An agreement between the debtor and cretitor whereby both the parties commit not to take recourse to any legal action during the period. The stand-still clause will be applicable only to a civil action and will not cover any criminal action. During the stand-still period, outstanding foreign exchange forward contracts, derivative products, etc., can be crystallised, provided the borrower agrees. The borrower will undertake that during the stand-still period the documents will stand extended for the purpose of limitation and that it will not approach any other authority for any relief and the directors will not resign during the stand-still period.

(c) Recovery - Once the first two options do not seem feasible, recovery process may be resorted to.

75% of creditors by value and 60% by number may take the decision on restructuring of the account. Such decision will be binding on all lenders under the terms of the ICA. However, if the JLF decides to proceed with recovery, the minimum criteria for binding decision under any relevant laws/Acts would be applicable.

The JLF is required to arrive at an agreement on the option to be adopted for CAP within 45 days from (i) the date of an account being reported as SMA-2, or (ii) receipt of request from the borrower to form a JLF. The JLF should sign off the detailed final CAP within the next 30 days from the date of arriving at such an agreement.

Restructuring Process

Corporate Debt Restructuring (CDR) mechanism, is an institutional framework for restructuring of multiple/ consortium advances of banks where  even creditors who are not part of CDR system can join by signing transaction to transaction based agreements.

If the JLF decides on restructuring, it will have the option of either referring the account to CDR Cell or restructure the same independent of the CDR mechanism.

Restructuring by JLF

If the JLF decides to restructure an account independent of the CDR mechanism, it should carry out a detailed Techno-Economic Viability (TEV) study. If found viable, the JLF may finalise the package within 30 days of signing the final CAP.

For accounts with AE of less than Rs.5000 million, the package should be approved and conveyed within the next 15 days for implementation.

For accounts with AE of Rs.5000 million and above, the TEV study and restructuring package will be subjected to an evaluation by an Independent Evaluation Committee (IEC) of experts. The IEC will give their recommendation to the JLF within a period of 45 days. Thereafter, if the JLF decides to go ahead with the restructuring, the restructuring package would have to be approved by all the lenders and communicated to the borrower within next 15 days for implementation.

Asset Classification benefit will accrue to such accounts as if they were restructured under CDR mechanism. For this purpose, the asset classification as on the date of formation of JLF will be taken into account.

The above-mentioned time limits are maximum permitted time periods and the JLF should try to arrive at a restructuring package as soon as possible in cases of simple restructuring.
Restructuring cases will be taken up by the JLF only in respect of assets reported as Standard, SMA or Sub-Standard by one or more lenders of the JLF. While generally no account classified as doubtful should be considered for restructuring, in cases where a small portion of debt is doubtful, the account may be considered under JLF for restructuring.

Wilful defaulters will not normally be eligible for restructuring. The decision to restructure such cases where the willful default can be rectified, should however have the approvals of the board/s of individual bank/s within the JLF who have classified the borrower as wilful defaulter.

The viability of the account should be determined based on acceptable benchmarks on Debt Equity Ratio, Debt Service Coverage Ratio, Liquidity/Current Ratio and the amount of provision required in lieu of the diminution in the fair value of the restructured advance, etc. The indicative benchmarks form a part of the circular on Restructuring of Assets.

Restructuring Referred by the JLF to the CDR Cell

If the JLF decides to refer the account to CDR Cell, the following procedure may be followed.

CDR Cell should directly prepare the TEV study and the restructuring plan in consultation with JLF within 30 days from the date of reference to it by the JLF.

For accounts with AE of less than Rs.5000 million, the above-mentioned restructuring package should be submitted to CDR Empowered Group (EG) for approval. CDR EG can approve or suggest modifications but ensure that a final decision is taken within 90 days, which can be extended up to 180 days from the date of reference to CDR Cell. However, such cases referred to CDR Cell will have to be finally decided by the CDR EG within the next 30 days. If approved by CDR EG, it should be approved by all lenders and conveyed to the borrower within the next 30 days.

For accounts with AE of Rs.5000 million and above, the TEV study and restructuring package will be evaluated by an Independent Evaluation Committee (IEC) of experts. The IEC will be required to give their recommendation to the CDR Cell under advice to JLF within a period of 45 days. Thereafter, if the JLF decides to go ahead with the restructuring, the same should be communicated to CDR Cell. CDR Cell should submit the restructuring package to CDR EG within a total period of 7 days from receiving the views of IEC. Thereafter, CDR EG should take a decision within the next 30 days. If approved by CDR EG, the restructuring package should be approved by all lenders and conveyed to the borrower within the next 30 days for implementation.

Other Issues/Conditions Relating to Restructuring by JLF/CDR Cell

The restructuring package should stipulate the timeline during which certain viability milestones would be achieved. The JLF must periodically review the account and consider initiating suitable measures as deemed appropriate.

29.1   Restructuring is to be completed within the specified time periods.

29.2    The principle of restructuring should be that the shareholders bear the first loss. With this principle in view, JLF/CDR may consider the following options when a loan is restructured:

·      Transferring equity of the company to the lenders to compensate for their sacrifices;
·      Promoters infusing more equity into their companies;
·       Transfer of the promoters’ holdings to a security trustee or an escrow arrangement till turnaround of company.

In case a borrower has undertaken diversification which has resulted in the stress on the core-business of the group, a clause may be stipulated for sale of non-core assets, if the TEV study states that the account is likely to become viable on hiving-off of non-core activities.

For restructuring of dues of listed companies, lenders may be compensated by way of equities of the company upfront. In such cases, the restructuring agreement shall not incorporate any right of recompense clause. However, if the lenders’ sacrifice is not fully compensated, the right of recompense clause may be incorporated to the extent of shortfall. For unlisted companies, the JLF will have option of either getting equities issued or incorporate suitable ‘right to recompense’ clause.

If acquisition of equity shares, as above, results in exceeding the regulatory Capital Market Exposure (CME) limit, the same will not be considered as a breach of regulatory limit. However, this will require reporting to RBI and disclosure in Annual Financial Statements.

In order to distinguish the security available to secured lenders, partially secured lenders and unsecured lenders, the JLF/CDR could consider various options like:

·       Prior agreement in the ICA among the lenders regarding repayments as per an agreed waterfall mechanism;
·       A structured agreement stipulating priority of secured creditors;
·       Appropriation of repayment proceeds among secured, partially secured and unsecured lenders in certain pre-agreed proportion.

The above is only an illustrative list and the JLF may decide on a mutually agreed option.

RBI’s  guidelines  on  CDR Mechanism will be applicable to the extent that they are not inconsistent with these guidelines. It has been decided that if restructuring has been decided as the CAP then banks will not be permitted to sell such assets to SCs/RCs, without arranging their share of additional finance to be provided by a new or existing creditor.

Prudential Norms on Asset Classification and Provisioning

With effect from April 1, 2015, a standard account on restructuring (for reasons other than change in DCCO) would be immediately classified as sub-standard. NPAs, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into lower categories as per the asset classification norms with reference to the pre-restructuring repayment schedule.

As a measure to ensure compliance of these guidelines and to impose disincentives for not maintaining credit discipline, accelerated provisioning norms are being introduced.
Accelerated Provisioning

Where banks fail to report SMA status to CRILC or resort to evergreening of the account, they will be subjected to accelerated provisioning along with other supervisory actions by RBI. The current provisioning requirements are as under: (applicable in all cases of lending)
Asset Classification
Period as NPA
Current provisioning (%)
Revised accelerated
provisioning (%)
Sub- standard (secured)
Up to 6 months
15
No change
6 months to 1 year
15
25
Sub-standard
(unsecured ab- initio)
Up to 6 months
25 (non infra loans)
25
20 (infra loans)
6 months to 1
year
25 (non infra loans)
40
20 (infra loans)
Doubtful  I
2nd year
25 (secured portion)
40 (secured portion)
100 (unsecured
portion)
100 (unsecured
portion)
Doubtful II
3rd & 4th year
40 (secured portion)
100 for both secured
and unsecured
portions
100 (unsecured portion)
Doubtful III
5th year onwards
100
100


Any lender having agreed to the restructuring decision and having signed the ICA and DCA, changes their stance later on, will also be subjected to accelerated provisioning as indicated above and also attract negative supervisory view during Supervisory Review and Evaluation Process. If the account is standard, the provisioning requirement would be 5%.

If lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame, the account will be subjected to accelerated provisioning as indicated above, if it is classified as an NPA. If the account is standard, the provisioning requirement would be 5%. In such cases if an account is reported by any of the lenders to CRILC as SMA 2 and the JLF is not immediately formed or CAP is not decided within the prescribed time limit, then the accelerated provisioning will be applicable only on the bank having responsibility to convene JLF. In other cases, accelerated provisioning will be applicable on all banks. Banks are also advised that in case the lead bank fails to convene JLF within 15 days of reporting SMA-2 status, the bank with second largest AE shall convene the JLF within the next 15 days, and have the same responsibilities and disincentives as applicable to the lead bank/bank with largest AE.

If an escrow maintaining bank does not appropriate proceeds of repayment among the lenders as per agreed terms, that bank will attract the asset classification which is lowest among the member banks, and will also be subjected to accelerated provision. Such accelerated provision will be applicable for a period of one year from the effective date of provisioning or till rectification of the error, whichever is later.

Wilful Defaulters and Non-Cooperative Borrowers(applicable in all cases of lending)

(a)    The provisioning in respect of loans to companies having directors, whose names appear more than once in the list of wilful defaulters, will be 5% in cases of standard accounts; in case of NPAs, it will attract accelerated provisioning as indicated above.

(b)    With a view to discourage defaulters from not co-operating with lenders in their recovery efforts, banks may classify such borrowers as non-cooperative borrowers. Banks will be required to report classification of such borrowers to CRILC. Banks will also be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers. However, for the purpose of asset classification and income recognition, the new loans would be treated as standard assets.

Dissemination of Information(applicable in all cases of lending)

At present, the list of Suit filed accounts of Wilful Defaulters of Rs.25 lakh and above is submitted to the Credit Information Companies (CICs), who display the same on their respective websites. The list of non-suit filed accounts of Wilful Defaulters of Rs.25 lakh and above is confidential and is disseminated by RBI among banks and FIs only for their own use. Banks are advised to forward data on wilful defaulters to the CICs/Reserve Bank at the earliest but not later than a month from the reporting date.

In case any falsification of accounts on the part of the borrowers is observed, Banks should lodge a complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI). The complaints may also be forwarded to the RBI and IBA for records, which in turn will circulate the names of the CA firms with other financial institutions/ financial sector regulators / Ministry of Corporate Affairs (MCA) / Comptroller and Auditor General (CAG).

Banks may seek explanation from advocates who wrongly certify the titles of assets or valuers who overstate the value of security. If no satisfactory reply is received within one month, their names may be reported to IBA. The IBA may circulate the names of such advocates and valuers among its members for consideration before availing of their services in future. The IBA would create a central registry for this purpose.

SMA-0  Signs of Stress

Illustrative list of signs of stress for categorising an account as SMA-0:

1.     Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control statements or (b) credit monitoring or financial statements or (c) non-renewal of facilities based on audited financials.

2.     Actual sales / operating profits falling short of projections accepted for loan sanction by 40% or more; or a single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of Drawing Power (DP) by 20% or more after a stock audit; or evidence of diversion of funds for unapproved purpose; or drop in internal risk rating by 2 or more notches in a single review.

3.     Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance/DP in the account or return of 3 or more bills / cheques discounted or sent under collection by the borrower.

4.    Devolvement of Deferred Payment Guarantee (DPG) instalments or Letters of Credit (LCs) or invocation of Bank Guarantees (BGs) and its non-payment within 30 days.

5.    Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms or for compliance with any other terms and conditions of sanction.

6.   Increase in frequency of overdrafts in current accounts.

7.   The borrower reporting stress in the business and financials.

8.     Promoter(s) pledging/selling their shares in the borrower company due to financial stress.C-2:   Framework   for   Revitalising   Distressed   Assets   in   the   Economy   -
Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures

Bank Loans for Financing Promoters’ Contribution

The promoters' contribution towards the equity capital of a company should come from their own resources and banks should not normally grant advances to take up shares of other companies.

Banks can finance ‘specialized’ entities established for acquisition of troubled companies subject to the guidelines applicable to advances against shares/debentures/bonds. The lenders should, however, assess the risks and ensure that these entities are adequately capitalized. The debt equity ratio of such companies should not be more than 3:1.

Credit Risk Management

Lenders should carry out their independent and objective credit appraisal and not depend on reports prepared by outside consultants, especially the in-house consultants of the borrowing entity.

Banks should carry out sensitivity tests/scenario analysis, especially for infrastructure projects, which should include project delays and cost overruns.

Lenders should ensure at the time of credit appraisal that debt of the parent company is not infused as equity capital of the subsidiary/SPV. Multiple leveraging is a matter of concern as it effectively camouflages the financial ratios, leading to adverse selection of the borrowers.

In order to ensure that directors are correctly identified, banks/FIs have been advised to include the Director Identification Number (DIN) as one of the fields in the data submitted by them to Reserve Bank of India/Credit Information Companies.

Banks should verify whether the names of any of the directors of the companies appear in the list of defaulters/ wilful defaulters. In case of doubt, banks should use independent sources for confirmation of the identity rather than seeking declaration from the borrowing company.


To facilitate certification by the auditors regarding diversion of funds by the borrower the banks will need to ensure that appropriate covenants in the loan agreements are incorporated to enable award of such a mandate by the lenders to the borrowers / auditors”.

Lenders could consider engaging their own auditors for such specific certification. However, this cannot substitute bank’s basic minimum own diligence in the matter.

38. Reinforcement of Regulatory Instructions

Banks were advised that before opening current accounts/sanctioning post sale limits, they should obtain the concurrence of the main bankers or the banks which have sanctioned inventory limits. Banks should also refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with them.

Banks must take necessary corrective action in case the above instructions have not been strictly followed. Non-compliance of RBI regulations in this regard is likely to vitiate credit discipline and RBI will consider penalising the non-compliant banks.

Banks are required to extinguish all available means of recovery before writing off any account fully or partly. Banks should henceforth disclose full details of write offs, including separate details about technical write offs, in their annual financial statements.

Registration of Transactions with CERSAI

The Government mandate to register all types of mortgages with CERSAI will have to be strictly followed by banks. Transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advances granted by banks and financial institutions, as defined under the SARFAESI Act, are to be registered in the Central Registry.

Board Oversight

Early recognition of problems in asset quality and resolution envisaged in these guidelines requires the lenders to be proactive and make use of CRILC as soon as it becomes functional.

Boards of banks should put in place a policy for timely submission of credit information to CRILC and accessing information therefrom, prompt formation of Joint Lenders’ Forums (JLFs), monitoring the progress of JLFs and adoption of Corrective Action Plans (CAPs), etc. There should be a periodical review, say on a half yearly basis, of the above policy.

The boards of banks should put in place a system for proper and timely classification of borrowers as wilful defaulters or/and non-cooperative borrowers. Further, Boards of banks should periodically review the accounts classified as such, say on a half yearly basis.


C- 3: Strategic Debt Restructuring Scheme


It has been observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational/ managerial inefficiencies. In such cases, change of ownership will be a preferred option. Henceforth, the Joint Lenders’ Forum (JLF) should actively consider such change in ownership under the “Framework for Revitalising Distressed Assets in the Economy”.


41.    With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may, at their discretion, undertake a ‘Strategic Debt Restructuring (SDR)’ by converting loan dues to equity shares, which will have the following features:

i.   At the time of initial restructuring, the JLF must incorporate, in the terms and conditions, an option to convert the loan into shares in the event the borrower’s failure to  achieve the viability milestones or adhere to ‘critical conditions’. Restructuring of loans without the approval for SDR from the borrower company is not permitted. If found viable, the JLF may decide on whether to invoke the SDR;

ii.                  Provisions of the SDR would also be applicable to the accounts which have been restructured before the date of this circular provided that the necessary enabling clauses are included in the agreement between the banks and borrower;

iii.                The decision on invoking the SDR should be taken by the JLF as early as possible but within 30 days from the review of the account. Such decision should be well documented and approved by the majority of the JLF members (minimum of 75% of creditors by value and 60% of creditors by number);

iv.  In order to achieve the change in ownership, the lenders under the JLF should collectively become the majority shareholder by conversion of their dues into equity. However the conversion of their debt into equity shall be subject section 19(2) of Banking Regulation Act, 1949 (No banking company shall hold shares in any company, of an amount exceeding 30%. of the paid-up share capital of that company or 30%. of its own paid-up share capital and reserves, whichever is less);

v.  Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company;

vi.  The share price for such conversion will be determined at Market value or Break-up value whichever is less subject to the floor of ‘Face Value’ ( explained below).

vii.  Henceforth, banks should include necessary covenants in all loan agreements, supported by necessary approvals of the borrower company, to enable invocation of SDR;

viii.  The JLF must approve the SDR conversion package within 90 days from the date of deciding to undertake SDR;

ix.    The conversion of debt into equity should be completed within a period of 90 days from the date of approval of the SDR package by the JLF. For accounts which have been referred by the JLF to CDR Cell for restructuring, JLF may decide to undertake the SDR either directly or under the CDR Cell;

x.  The invocation of SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms;

xi.    On completion of conversion of debt to equity, the existing asset classification of the account, as on the reference date, will continue for a period of 18 months from the reference date. Thereafter, the asset classification will be as per the extant IRAC norms. However, when banks’ holding are divested to a new promoter, the asset classification will be as per the para (xiii) given below;

xii.   Banks should ensure compliance with the provisions of Section 6 of Banking Regulation Act and JLF should closely monitor the performance of the company and consider appointing suitable professional management to run the affairs of the company;

xiii.  On divestment of banks’ holding in favour of a ‘new promoter’, the asset classification of the account may be upgraded to ‘Standard’. However, the provision held by the bank against the said account, shall not be reversed. At the time of divestment, banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as ‘restructuring’. Banks should make provision for any diminution in fair value of the existing debt on account of the refinance. Banks may reverse the provision only when all the facilities perform satisfactorily during the ‘specified period’. In case, satisfactory performance is not evidenced, the asset classification would be governed by the extant IRAC norms as per the repayment schedule that existed as on the reference date (date of JLF’s decision to undertake SDR), assuming that ‘stand-still’ / above upgrade in asset classification had not been given. However, in cases the bank exits the account completely, the provision may be reversed;

xiv. The asset classification benefit provided at the above paragraph is subject to the following conditions:
a.     The  ‘new  promoter’  should  not  be  a  person/entity/subsidiary/associate  etc., from the existing promoter group; and
b.    The new promoters should have acquired at least 51% of the paid up equity capital of the borrower company. If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter should own at least 26% of the paid up equity capital or up to applicable foreign investment limit, whichever is higher, provided banks are satisfied that with this equity stake the new non-resident promoter controls the management of the company.

The conversion price of the equity shall be determined as per the guidelines given below:

(i) Conversion of outstanding debt into equity should be at a ‘Fair Value’ which will not exceed the lowest of the following, subject to the floor of ‘Face Value’ :

a)     Market value (for listed companies): Average of the closing prices of the instrument on a recognized stock exchange during the ten trading days preceding the ‘reference date’ indicated at (ii) below;

b)  Break-up value: Book value per share to be calculated from the company's latest audited balance sheet adjusted for cash flows and financials post the earlier restructuring; the balance sheet should not be more than a year old. In case the latest balance sheet is not available this break-up value shall be Re.1.

(ii) The above Fair Value will be decided at a ‘reference date’ which is the date of JLF’s decision to undertake SDR.

The above pricing formula under SDR Scheme has been exempted from the SEBI Regulations, subject to certain conditions. Further, in the case of listed companies, the acquiring lender on account of conversion of debt into equity under SDR will also be exempted from the obligation to make an open offer. Banks should adhere to all the prescribed conditions by SEBI in this regard.

In addition to conversion of debt into equity under SDR, banks may also convert their debt into equity at the time of restructuring of credit facilities under the extant restructuring guidelines. However, exemption from regulations of SEBI, as detailed above, shall be subject to adhering to the guidelines stipulated in the above paragraphs.

Acquisition of shares due to such conversion will be exempted from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para-Banking activities and intra-group exposure. However, this will require reporting to RBI  and disclosure in Annual Financial Statements. The acquired equity shares shall be assigned a 150% risk weight for a period of 18 months from the ‘reference date’. After 18 months from the ‘reference date’, these shares shall be assigned risk weights as per the extant capital adequacy regulations.

Equity shares acquired and held by banks under the scheme shall be exempt from the requirement of periodic mark-to-market for the 18 month.

Conversion of debt into equity may result in the bank holding more than 20% of voting power, which will normally result in an investor-associate relationship under applicable accounting standards. However, as the lender acquires such voting power in the borrower entity in satisfaction of its advances under the SDR, and the rights exercised by the lenders are more protective in nature and not participative, such investment may not be treated as investment.

Based on the Master Circular of 1/7/15.
Please visit www.rbi.org.in  for any further clarification if required…………….. Poppy