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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.
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.
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.
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