The RBI, in its recent circular titled "Strategic Debt
Restructuring Scheme", provided a framework whereby
lender banks have been granted enhanced capabilities to initiate a
change in ownership of a defaulting borrower by converting the loan
dues into equity shares. As per the circular, the option to resort
to SDR must be approved by the shareholders of the borrower company
by way of a special resolution at the time of the initial
restructuring. During the restructuring, if the lenders decide to
undertake the SDR mechanism, a maximum period of 180 days is
available for them to complete the conversion of the debt to equity
either by the lenders themselves or through the CDR mechanism.
Lenders must acquire atleast 51% of the share capital of the
borrower. The circular seems to give lenders the discretion to
determine the fair value, i.e., the price at which the debt is
converted into equity, subject to upper and lower limits. As there
is no clarity on how to arrive at the fair value or on whether the
fair value also requires the approval of the borrower's
shareholders, the provision seems to be lender centric.
Post conversion, the lenders must strive to divest control of
the defaulting borrower to a 'new promoter' at the
earliest, allowing them to recuperate their loan dues. The debt
will be reclassified as a standard asset and the lenders may
refinance the company if necessary. This benefit is not available
if the lenders fail to divest. Additionally, the conversion under
the SDR scheme shall benefit from an exempt from the requirements
of making an open offer under the SEBI Takeover Regulations.
However, this benefit does not extend to when the lenders divest
their control to new promoters.
The SDR mechanism is a potent weapon in the hands of lenders as
it ensures that the shareholders bear the first loss rather than
the debt holders. While practical hardships might discourage
lenders from resorting to SDR, it will certainly ensure that
promoters take measures to please their lenders.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
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