Defaulting promoters risk losing firms as banks look to tame NPAs with management control

The Reserve Bank of India (RBI) has directed banks to take management control of companies as and when promoters fail to adhere to the terms of a restructured loan, putting an end to all sweet restructuring deals that banks were offering to some of the promoters.

When banks restructure loan accounts, they usually extend the repayment period, offer moratorium on the loan outstanding and in some cases, even take a haircut. In many cases, banks used to give long ropes to errant borrowers.

In a bid to force banks to restructure accounts with a tight noose around the promoters, the banking regulator has asked banks to put in conditions to convert the entire loan including the unpaid interest into shares of the company in the event the borrower is not able to achieve the viability milestones or adhere to the critical conditions as stipulated in the restructuring package.

Post the conversion, all lenders under the joint lenders' forum (JLF) must collectively hold 51% or more of the equity shares issued by the company. JLF and lenders should divest their holdings in the equity of the company as soon as possible. On divestment of banks' holding in favour of a 'new promoter' the loan can be classified as standard.

Bank managements have also been reluctant to take action or unsettle the existing management in companies. RBI's directive on strategic debt restructuring (SDR) is to force banks to restructure accounts only with strict conditions.

According to estimates of rating agency Icra, non-performing assets of the banking system will rise to 5.9 % of the total bank loans by March 2016 from 4.4 % of total bank credit reported at the end of March 2015.

RBI said in a tersely worded release, "If the borrower is not able to achieve the viability milestones and/or adhere to the 'critical conditions', the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership. If found viable under such examination, the JLF may decide on whether to invoke the SDR, i.e., convert the whole or part of the loan and interest outstanding into equity shares in the borrower company, so as to acquire majority shareholding in the company."

Praveen Kumar Gupta, chief financial officer, State Bank of India (SBI), told dna, "It will be a big help to banks as the promoters now know the risk of restructuring. Earlier, banks just had their representatives on the boards of companies, but nothing much was happening. The new RBI directive will mean a more concerted action in changing the management and getting someone to run the company."

The debt conversion should be supported by necessary approvals and authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable the lenders to exercise the said option effectively. Restructuring of loans without approvals for SDR will not be permitted. Provisions of the SDR would also be applicable to the accounts which have been restructured before the date of this circular provided that the necessary enabling clauses are in place.

Parthasarathi Mukherjee, group executive - corporate relationships and international business, Axis Bank, told dna, "This a big enabler for banks to enforce a change in management. Earlier, banks did not have a legal sanction to convert debt into equity."

The decision on invoking the SDR by converting the whole or part of the loan into equity shares should be taken by the JLF as early as possible but within 30 days from the review of the account, said the RBI circular. Such decision should be well documented and approved by the majority of the JLF members (minimum of 75% of creditors by value and 60% of creditors by number), says the central bank.