RBIs Strategic Debt Restructuring Scheme
Indian Banks are witnessing rising NPA's (Non-Performing Assets) due to the slowdown in the Indian economy and high interest costs. The Reserve Bank of India has introduced various measures for controlling NPAs in the Bank including Asset Reconstruction Companies, SARFESI Act, Joint Lenders Forum (JLF), etc.,
However, the NPA figure in banks continue to remain high and hence the RBI has recently introduced the Strategic Debt Restructuring Scheme. In this article, we look at the Strategic Debt Restructuring Scheme in detail.
Strategic Debt Restructuring Scheme:
The RBI in its "Framework for Revitalising Distressed Assets in the Economy - Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)" has suggested change of management as a part of restructuring of stressed assets.
With this principle in view and to ensure that the shareholders bear the first loss rather than the debt holders, the RBI suggests transfer of equity shares of the company by promoters to lenders to compensate for their sacrifices.
Traditionally in many cases of restructuring, borrower companies are not able to come out of financial stress due to operational or managerial inefficiencies despite substantial sacrifices made by the lending banks.
In such cases, change of ownership will be the most preferred option for the Lenders. Hence, the RBI suggests that Joint Lenders' Forum (JLF) should actively consider such change in ownership and take necessary action.
Implementation of the Strategic Debt Restructuring Scheme:
The following are actions that borrowers may witness based on the implementation of the strategic debt restructuring scheme by the Bank:
- No loans will be restructured without conforming to the terms specified in the Strategic Debt Restructuring Scheme.
- At the time of initial restructuring, Joint Lender Forums will incorporate, in the terms and conditions attached to the restructured loan/s agreed with the borrower, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones.
- The bank during initial restructuring will require the borrower to provide the necessary approvals/authorisations (including special resolution by the shareholders) to enable the lenders to exercise the transfer of equity option effectively, if required.
- If the borrower is not able to achieve the viability milestones and/or adhere to restructuring conditions, the JLF may review the account and effect a change in ownership, if required.
- The decision to convert the whole or part of the loan into equity shares 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).
- On effecting change in ownership under the Strategic Debt Restructuring Scheme, the lenders would collectively become the majority shareholder by conversion of their dues from the borrower into equity.
- Hence, post the conversion, all lenders under the JLF will collectively hold 51% or more of the equity shares issued by the company.
- All banks will include the covenants to exercise the Strategic Debt Restructuring Scheme in all loan agreements, including restructuring, supported by necessary approvals/authorisations.
Valuation for Conversion of Debt into Equity:
The adjustment of equity against outstanding debt (principal as well as unpaid interest) would be at a 'Fair Value' which will not exceed the lowest of the following:
- Market value (for listed companies only): Average of the closing prices of the instrument on a recognized stock exchange during the ten trading days preceding the 'reference date'.
- Break-up value (for unlisted companies): Book value per share to be calculated from the company's latest audited balance sheet (without considering 'revaluation reserves', if any) 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 Rs.1.
Advantages for Bankers under the SDR Scheme:
RBI has provided the following advantages to the Bankers to ensure the Strategic Debt Restructuring Scheme is adopted by the Bankers aggressively:
- On conversion of debt to equity as approved under SDR Scheme, the existing asset classification of the account, as on the reference date will continue for a period of 18 months from the reference date.
- Acquisition of shares due to the execution of strategic debt restructuring scheme will be exempted from regulatory ceilings or restrictions on capital market exposures, investment in para-banking activities and intra-group exposure.
- Equity shares acquired and held by banks under the SDR scheme will be exempt from the requirement of periodic mark-to-market.
- Conversion of debt into equity in an enterprise by a bank 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 in associate.
- On divestment of banks' holding in favour of a 'new promoter', the asset classification of the account may be upgraded to 'Standard'. Further, at the time of divestment of their holdings to a 'new promoter', banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as 'restructuring' subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance.
"Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company," RBI said, adding that the invocation of SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms.
Banks will also have to closely monitor the performance of the company. At the same time, the banks themselves should try and sell their stake "as soon as possible".
As and when the equity is transferred to a new owner, the banks can upgrade the loan category to 'standard' from 'stressed' account.
However, the lenders will continue to carry the existing provisions as long as they have exposure to the account, and as long the account is stressed in its repayment obligation. Alternatively, if the banks manage to exit the company completely, they can write back the existing provision in their books.