RBI announced Strategic Debt Restructuring Scheme

The Reserve Bank of India (RBI) on 8 June 2015 announced Strategic Debt Restructuring (SDR) Scheme which allows banks and non-banking lending institutions to convert their loans into equity stake.

The scheme will benefit all Scheduled Commercial Banks, excluding Regional Rural Banks (RRBs), all-India term-lending and Refinancing Institutions including Export-Import (EXIM) Bank and National Housing Bank (NHB) and National Bank for Agriculture and Rural Development (NABARD).

Key Features of Strategic Debt Restructuring (SDR) Scheme

•    Lenders will have the right to convert their outstanding loans into a majority equity stake if the borrower fails to meet conditions stipulated under the restructuring package.
•    Lenders must stipulate in the debt restructuring deal itself that if the borrower fails to meet certain milestones in terms of performance, they would have the option to convert part or whole of the debt into equity.
•    A decision on invoking the SDR should be taken within 30 days after a review of the account of borrowers.  It should be approved by 75 percent of the creditors by value and 60 percent of creditors by number.

•    The lenders must approve the SDR conversion package within 90 days after taking such a decision.
•    Post conversion, all lenders should together own 51 percent or more of the company's equity.
•    A joint lenders forum (JLF) should closely monitor a company's performance and appoint a suitable professional management.
•    Lenders should divest equity holdings of the company to new promoters as soon as possible.
•    New promoter should not be a person/entity/subsidiary/associate, etc (domestic as well as overseas), from the existing promoter/promoter group.
•    The new promoter has to acquire the entire 51 percent. However, if foreign investment is limited to less than 51 percent, the new promoter should own at least 26 percent of the paid-up equity capital or up to the applicable foreign investment limit.
•    On divestment of banks' holding in favour of a new promoter, the asset classification of the account may be upgraded to standard.
•    The formula for conversion of debt into equity will be different from existing norms laid down by the Securities & Exchange Board of India (SEBI) for banks.
•    The price of debt to equity conversion will be capped either at the market value of the borrowing company (if it is listed) or the book value as per the latest balance sheet (for unlisted firms). Share conversion cannot happen at below par that is less than the face value of 10 rupees.
•    Conversion of debt into equity will also be exempted from regulatory ceilings on capital market exposures, investment in para-banking activities and intra-group exposure.

Comment

RBI announced the scheme against the backdrop of huge surge in bad loans or Non Performing Assets (NPAs) in the banking system. As per an estimate, the Gross NPAs may rise to 5.9 percent of total advances during 2015-16 against 4.4 percent during 2014-15.

NPAs are those assets, where Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.

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