MUMBAI: Banks now have more scope to change the management of companies that are in trouble because of operational or managerial inefficiency of their promoter. The Reserve Bank of India has extended the freedom given to lenders to convert debt into shares to even those companies where no attempt has been made to restructure the loan.
At the same time, the central bank has given more heft to the joint lender’s forum (JLF) – a platform created by the RBI to ensure concerted action where there is more than one lender – by ensuring participation of top management. The two largest banks, State Bank of India and ICICI Bank, have been given permanent position on the forum.
The move highlights a fresh urgency on the part of the RBI to tackle bad debt. Analysts are forecasting further slippages as overleveraged corporates are finding it difficult to generate cash flows to service their debts. Until now, lenders could bring about management change only after they had made all-out efforts to restructure the loan and ease repayments.
In a circular to all banks, the RBI said that change in ownership can take place by way of sale to a new promoter by invocation of pledge or conversion of debt of the borrower into equity outside a strategic debt restructuring (SDR) programme. On change of ownership, banks can upgrade the credit facilities as ‘standard’ as against non-performing asset earlier. The only condition is that the new promoter should hold at least 51% equity in the new entity. If the new promoter is a foreign entity and is constrained by FDI limits, transfer of ownership can take place by handing over 26% stake and ensuring that the foreign entity has management control.
In a separate communication, the RBI has sought to beef up the JLF by allowing it to restructure accounts classified as ‘doubtful’. The central bank has also allowed lenders who do not agree with majority view to exit their exposure completely by selling to new lenders.
In case the restructuring – which is proposed as a corrective action plan by lenders – fails, banks can use the strategic debt restructuring route to change the management in stressed companies.