Thursday, July 30, 2015

STRATEGIC DEBT RESTRUCTURING

Lenders to the Kolkata-based Electrosteels Steels Ltd have taken 'in-principle' decision to take over the management  control of the company by acquiring majority stake in  equity by invoking Strategic Debt Restructuring (SDR), in line with Reserve Bank' guidelines on SDR issued on June 8 this year. Electrosteels Steels Ltd is a chronic defaulter with exposure of about Rs 100000 million to the banks.

In my last article on "Debt Restructuring by Banks", I had expressed my apprehension that the borrowers had taken advantage of the incentive for quick implementation of the debt restructuring given to banks. As per a study, Indian banks' problem loan ratios are unlikely to fall in 2015-16. Any significant increase in the capital levels of public sector banks is also not expected over the next two years.

Provisions for mounting non-performing assets; and little capital in hand, put together, squeezes the lending powers of  banks. What is the alternative  - only recovery, but then the present tools of recovery available with  banks are not giving desired results. Reserve Bank has come out with a new ammunition  - Strategic Debt Restructuring

RBI 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 sacrifice by lending banks. With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may undertake "Strategic Debt Restructuring" by converting loan dues to equity shares, of course subject to certain stipulations, some are as below;-

1.    Lenders should collectively become the majority shareholder by conversion of their dues from the borrower into equity.
2.    Post the conversion, all lenders must collectively hold 51% or more of the equity shares issued by the company.
3.    Lenders should closely monitor jointly (under Joint Lenders' Form) the performance of the company and consider appointing suitable professional management to run the affairs of the company.
4.    Lenders should divest their holdings in the equity of the company as soon as possible to a 'new promoter' who should not be a person/entity/subsidiary/associate etc (domestic as well as overseas), from the existing promoter/promoter group. Banks should clearly establish that the acquirer does not belong to the existing promoter group. 


In public sector banks, the decision taking has come to a grinding halt due to the continuous sword of regulator, CVC, CBI etc hanging over their heads. These agencies are always carrying magnifying glasses to read between the lines. Whether banks will use fearlessly this new tool of 'Strategic Debt Restructuring' with so tough stipulations attached to it. Whether this new weapon will not lie resting in the armoury of  banks. Let's hope for the best.


Tilak Gulati is Assistant General Manager at UCO Bank.

visit me: www.itstrgulati.blogspot.in
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2 comments:

  1. Nice attempt Gulati ji in explaining the new guidelines and a possible recovery tool in the hands of banks along with strings attached in implementation.Keep on writing.
    However , the bigger threats is lack of top level of professionalism which is needed to implement it. My fear is that it is easy to convert debt into equity, but very difficult to employ professionals to run the company successfully.
    Rajesh agrawal
    Ex GM UCOBANK

    ReplyDelete
  2. Nice attempt Gulati ji in explaining the new guidelines and a possible recovery tool in the hands of banks along with strings attached in implementation.Keep on writing.
    However , the bigger threats is lack of top level of professionalism which is needed to implement it. My fear is that it is easy to convert debt into equity, but very difficult to employ professionals to run the company successfully.
    Rajesh agrawal
    Ex GM UCOBANK

    ReplyDelete

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