Comments
With banks not making any headway in effecting ownership change in borrower companies under the strategic debt restructuring (SDR) mechanism, the Reserve Bank of India has mooted that they jointly float two funds — one to temporarily take over ownership of the companies by infusing equity capital in them and the second to provide working capital for the day-to-day operations of these companies.
In June 2015, the central bank allowed banks to undertake SDR by converting loan dues into equity shares in borrower companies if they fail to achieve certain viability milestones (such as improvement in certain financial ratios after a period of time, say, six months, one year and so on).
While banks have converted loan dues into equity shares in some companies, they have been unable to effect change in ownership.
Banks have invoked SDR in the case of companies such as IVRCL, Gammon India, Electrosteel Steels, and Alok Industries.
A top public sector bank official, well-versed with developments on the SDR front, said: “Banks don’t have the bandwidth to manage defaulting borrower companies once they take majority stake in them. So, the RBI has proposed that they float a fund, which will not only infuse capital in these companies but also undertake the task of operating and maintaining them till a new owner is found.”
Since provisioning implications hold back banks from providing fresh working capital to defaulting companies even if they are undergoing SDR, the RBI has proposed to the Indian Banks’ Association that banks float a separate fund to meet the working capital requirements of such companies.
The RBI proposal to the Association, regarding floating two funds for revitalising the SDR mechanism is at a preliminary stage, said the official. If the proposal turns into reality, it could go a long way in helping banks clean up their balance sheets before the RBI set deadline of March 2017.
Under the SDR, all lenders collectively hold 51 per cent or more of the equity shares issued by the company after conversion of debt into equity.
When the central bank unveiled the SDR mechanism for banks in June last it observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational/ managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be a preferred option.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.