CA Pooja Sagar
Indian Banks are facing rising NPA’s due to slowdown in the Indian economy and high interest cost. Therefore, in order to deal with the defaulting companies the Reserve Bank of India has introduced the scheme of “Strategic Debt Restructuring” (SDR). This scheme will give the right to lender to convert the loan dues to equity shares. The general principle behind it is that shareholders should bear the first loss rather than the debt holders
RBI made it clear that this scheme will come into play when bank observes that even after restructuring of accounts, the borrower company is not able to come out of stress due to operational/managerial inefficiencies despite substantial scarifies made by the lending banks. Therefore, the preferred route to overcome this issue will be change in ownership.
For invoking SDR, Joint Lender Forum (JLF)/CDR have to incorporate the option of conversion of loans dues into equity shares in the terms and conditions at the time of initial restructuring. Accordingly if the borrower is not able to achieve the viability milestone and/or to adhere to critical conditions stipulated in the restructuring package, the banks will be forced to opt for the conversion option.
The salient features of Strategic Debt Restructuring are:
a) Market Value (for listed companies): Average of the closing prices of the instrument on a recognized stock exchange during the ten days preceding the reference date.
b) Break-up Value (for unlisted companies): Book value per share to be calculated from the company’s latest audit balance sheet adjusted for cash flows and financial post the earlier restructuring. Revaluation reserve will be ignored for the calculation. The balance sheet should not be more than a year old. In case of balance sheet is not available the break- up value will be Re1.
a) Bank should ensure that new promoter whether domestic or overseas should not be person/entity/subsidiary/associate etc related to the existing promoter/promoter group.
b) The new promoter should acquired atleast 51% paid up equity capital of the borrowing company. In case of non-resident as a new promoter, the promoter should atleast own the equity capital as per the applicable foreign investment limit.
After divestment to new promoter, bank may refinance the company on account of change in the risk profile subject to provision for diminution in fair value of the debt which is refinanced.
Bank may reverse the provision held against the said account on satisfactory servicing of principal and interest amount as per the specified terms and conditions. In case of deviation from the terms, the asset classification of the restructured account would be governed by the IRAC norms as per the repayment schedule that existed as on the reference date.
The scheme has received mixed reviews from the bank experts. Some have the opinion that borrower will start exercising diligence in managing funds fearing the loss of management to the bank. Others are of the view that it will be tedious and time consuming to run a company. Also it would be difficult to find buyer for floundering company.
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