RBI allows banks to takeover ownership of stressed firm

Mumbai: Providing more teeth to lenders, RBI on Monday allowed banks to take control of debt-laden companies by converting loans into equity, if a debt restructuring fails to revive them within a stipulated timeframe.

Capital markets regulator Sebi has already relaxed the norms for banks to take over the ownership of such companies under a new Strategic Debt Restructuring regime.

"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...," RBI said in a notification.

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 or managerial inefficiencies despite substantial sacrifices made by the lending banks, it said.

In such cases, change of ownership will be a preferred option, it said, adding, the Joint Lenders' Forum (JLF) should actively consider such change in ownership.

As per the notification, "at the time of initial restructuring, the JLF must incorporate, in the terms and conditions attached to the restructured loans 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 and/or adhere to 'critical conditions' as stipulated in the restructuring package."

This should be supported by necessary approvals including special resolution by the shareholders from the borrower company, as required under regulations, to enable the lenders to exercise the said option effectively, it said.

"Restructuring of loans without the said approvals for SDR is not permitted. If the borrower is not able to achieve the viability milestones and adhere to the 'critical conditions' referred to above, the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership," it said.