Sebi eases debt conversion norms for banks in distressed companies

To help lenders deal with defaulting corporate borrowers, Sebi today relaxed norms for them to convert their debt into equity in distressed listed companies -- a move that may lead to a sharp surge in restructuring of bank loans.

The decision to tweak the pricing formula for conversion of debt into equity 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.

The total non-performing assets of public sector banks alone stand at nearly Rs 3 lakh crore, while top 30 defaulters are sitting on bad loans worth Rs 95,122 crore as on December 2014. In the past, banks have converted bad debt into equity in a few cases like Kingfisher but the conversion has been mostly difficult including due to regulatory and legal issues.

With the changed norms, 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 per cent stake in the concerned company.

Describing the decision as "major", Sebi chairman U K Sinha said now exemptions have been given from certain regulations.

"Our feeling is that with this, which has been done in close coordination with RBI, there will be a great demand for restructuring of bank loans, either promoters 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 a major thing and this is pending the larger issue of Bankruptcy Code and all, he said after the board meeting here where the decision in this regard was taken.

The relaxation in terms of pricing would be subject to the allotment price being as per a fair price formula prescribed and not being less than the face value of shares.

Other requirements would be available if conversions are undertaken as part of the proposed Strategic Debt Restructuring (SDR) scheme of RBI.

"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," Sebi said.

Currently, banks can convert debt into equity in cases of bad loans but there have been regulatory issues with regard to distressed listed companies. The new pricing formula have now simplified the procedure.