By its circular DBR.BP.BC.No.101/21.04.132/2014-15 dated 08 June 2015 ("Circular"), the Reserve Bank of India ("RBI") has introduced the Strategic Debt Restructuring Scheme ("SDR") that may be undertaken by banks for the revitalization of distressed assets. Pertinently RBI's circular on Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders' Forum ("JLF") and Corrective Action Plan dated 26 February 2014, provided that the lenders may consider the possibility of change in the management of the borrower as a part of restructuring of stressed assets.
Vide this Circular, the RBI has facilitated banks with certain powers and also specified procedures to initiate a change in ownership in accounts that have failed to achieve projected viability milestones and/ or adhere to the critical conditions. The important features of the SDR are encapsulated below:
1. As per the Circular, the banks may, at their discretion undertake an SDR by way of converting the whole or part of their loan into equity shares in the borrowing company in order to acquire the majority shareholding in the borrowing company. Such a decision of invoking the SDR must be taken within 30 days of the review of the particular stressed account by the JLF.
2. The decision of implementing SDR has to be approved by 75 per cent of the creditors by value and 60 per cent of the lenders by number.
3. Such conversion of debt into equity must be completed within 90 days of the decision of the creditors.
4. After the conversion into equity, the JLF must collectively hold 51 per cent or more of the equity shares of the borrowing company in conformity to limits prescribed under the Banking Regulation Act, 1949.
5. JLF and the lenders should divest their holding in the equity of the company as soon as possible.
6. Such conversion of the outstanding debt into equity must be made at the "Fair Value" to be determined as per the methodology specified in the Circular.
7. The above pricing under the SDR has been exempted from certain specified provisions of SEBI Regulations. The provisions of SDR are also applicable to accounts that have been previously restructured before the issuance of this Circular provided that the conditions mentioned in the Circular for such accounts are complied with.
8. Such SDR accounts will not be treated as restructured for the purposes of asset classification and provisioning norms.
For complete text of the Circular, please click here.
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