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RBI Approval for Banks to Take Control of Debt-Ridden Firms
Jun 10, 2015

In a bold move, the RBI empowered banks to take control of a company if it fails to meet specific milestones under the Corporate Debt Restructuring (CDR) plan. Under a new Strategic Debt Restructuring (SDR) scheme, banks, as majority owners, can then find professionals to run the company and then divest stake in order to recover their dues.

  • The central bank has proposed setting a timeline of 30 days from the review of the restructured loan account for invoking the SDR. All loan agreements will include clauses to invoke the SDR.

  • Before a loan account turns non-performing, banks are required to identify the stress signs, and set up a Joint Lenders’ Forum (JLF) to draw up a corrective action plan involving rectification and restructuring.

  • If this too fails, the recovery action will start.

  • Under the SDR, the conversion of debt into equity is to be completed within 90 days of the date of approval of the SDR package by the JLF.

  • Since banks will get control of a company under the SDR scheme, they will be able to check diversion of funds, put in place a professional management, turnaround the company and later sell their equity holding to recover their dues.

  • To encourage conversion of debt into equity, the invocation of the SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms.

  • Equity shares acquired and held by banks will be exempted from the mark-to-market requirement.

  • To encourage new promoters to come in, the asset classification of the account may be upgraded to ‘Standard’ post divestment of stake by the lending banks.

  • The conversion of outstanding debt (principal as well as unpaid interest) into equity should be at a ‘fair value’.

  • In the case of listed companies, the acquiring entity will be exempted from the obligation of making an open offer.


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