Sebi notifies debt conversion norm for banks in distressed cos

Move will give bankers larger say in distressed firms by allowing them to acquire majority stake and take over management

To help lenders deal with defaulting borrowers, Securities and Exchange Board of India (Sebi) has notified new norms for banks to convert their debt into equity in distressed companies — a move that might lead to a sharp rise 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 a distressed company by acquiring a majority stake and taking over the management.

The total non-performing assets of the public sector banks stand at nearly Rs 3 lakh crore, while the top 30 defaulters are sitting on bad loans worth Rs 95,122, crore as of December-end.

In the past, banks have converted bad debt into equity in a few cases like Kingfisher, but the conversion has been mostly difficult due to regulatory and legal issues.

Acquisition of equity shares by the consortium of banks, financial institutions and other secured lenders pursuant to conversion of their debt as part of the Strategic Debt Restructuring Scheme will be in accordance with the guidelines specified by the Reserve Bank, Sebi said.

At present, 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 simplified this procedure.

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.

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.