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Capital markets regulator Securities and Exchange Board of India (Sebi) has joined the fight against a rise in bad loans and non-cooperative borrowers.
Its board of directors on Sunday decided to relax the norms governing conversion of debt into equity, giving lenders more room to tackle bad loans, say experts. The board agreed to ease the formula for arriving at a conversion price and in regard to the Takeover Code.
According to sources, the stock market regulator is also finalising guidelines to restrict “wilful defaulters” from the securities market. It is likely to bar the latter from making a public issue of equity or debt.
A report from credit rating agency ICRA says gross non-performing assets (NPAs) in the banking system had increased to 4.5 per cent of the total as on end-December. NPAs for state-owned banks are more than the sector average.
Sebi is yet to issue the fine print for conversion of debt into equity but has said it will relax the applicability of certain provisions under the Issue of Capital and
Disclosure Requirements and the Substantial Acquisition of Shares and Takeovers regulations in cases involving listed borrowers in distress.
“Allowing conversion of debt into equity will empower borrowers, as they will not have to worry about the conversion price formula,” said Shinjini Kumar, executive director and leader (banking and capital markets) at PwC.
At present, the price for converting debt into equity, construed as preferential allotment, has to be via a Sebi formula. Often, the price is too high to make the transaction viable.
For instance, in 2011, lenders to Kingfisher Airlines had to convert debt amounting to Rs 1,400 crore into equity at a 60 per cent premium to the then market rate. The conversion price by Sebi's formula (average price of weekly high and low for previous six months or 15 days, whichever is higher) worked out to Rs 64.5. However, the shares of Kingfisher traded at Rs 40 each in the secondary market during the time of conversion.
Sebi has said the pricing will now be on “a fair price formula”, not less than the face value. Experts say this formula could be linked to the condition of the company and this would make it easier for lender and promoter to come to the discussion table without worrying about the secondary market price.
Sebi, however, has said the minimum conversion price has to be the face value, which experts feel could work out to be high in some cases.
Jay Parikh, partner, Versus, said the relaxations for converting debt into equity might not be available in all cases but “maybe only as a last-resort option or for cases under CDR (corporate debt restructuring)”.
Sebi has said further relaxations will be provided if conversions are undertaken as part of the proposed Strategic Debt Restructuring scheme of the Reserve Bank.
Legal experts have said Sebi, while framing the detailed regulations, will have to ensure the interests of existing public shareholders are protected.
