Sebi relaxes debt conversion norms for distressed companies

In a move to help banks deal with defaulting corporate borrowers, markets regulator Securities and Exchange Board of India (Sebi) on Sunday eased norms for lenders to convert their debt into equity in distressed listed companies.

The move would also pave the way for bankers to have a larger say in activities of the distressed company by acquiring majority stake and taking over the management.

With the changing of the formula for conversion of debt into equity, pricing would be based on "fair value" with some safeguards, and conversion into equity can only happen when the lenders have acquired at least 51 percent stake in the concerned company.

Sebi chairman U.K. Sinha described the decision as "major".

"Our feeling is that with this (move), which has been done in close coordination with RBI, there will be a great demand for restructuring of bank loans.. either promoter of companies will bring money from some source and then they will pay up the debt or bankers will be in a position to take over the management," he said.

"This is intended to revive such listed companies and provide more flexibility to lending institutions to acquire control over the company in the process of restructuring, to the benefit of all the stakeholders," he said.

The NPAs, or bad loans, of public sector banks rose to 5.33 percent of total advances in September 2014, from 4.72 percent in March 2014.

NPAs of public sector banks alone stand at nearly Rs.300,000 crore.