Companies failing to meet loan recast deadline may have to cede control

NEW DELHI: Companies seeking easier terms on their loans face the prospect of ceding management control to lenders under a new scheme being considered by the finance ministry and the Indian Banks’ Association (IBA).

Further, promoters of a company will have to pledge a minimum 40% of their equity holding with banks for loans to be restructured.

And, if the promoter fails to deliver results within the time-frame stipulated in the loan restructuring agreement, banks will take over the company’s management as in the case of software services company Satyam, which was later sold to Tech Mahindra.

The new approach was discussed earlier this week at a meeting between Financial Services Secretary Rajiv Takru and IBA, which represents state-owned and private sector banks. The finance ministry and banks under the umbrella of IBA have drawn up a list of troubled companies where the new rules will soon be applicable, a senior finance ministry official involved in the discussions told ET.

Banks are considering a change in management in case of five companies, said another person aware of the deliberations. Takru declined to comment on the outcome of the meeting, but said the exercise was meant to restore “order” in the financial sector. “We shall restore order through discussions and persuasion,” he said.

New rules could be part of debt restructuring packages

However, if we find that somebody is being difficult, we will use stronger means, if we must,” Takru said. The heads of two state-run banks confirmed that the broad thrust of the deliberations was to ensure that promoters have more ‘skin in the game’ by holding out the threat of losing ownership and control. “The idea is to force (the owners of) those companies which do not intend to put (in) money. If we can find a better promoter, then he can revive the company and buy back those shares,” said the chairman of a public sector bank. He and the finance ministry official quoted earlier spoke on condition of anonymity as the new rules were still being discussed.

IBA Chairman KR Kamath said the purpose of the exercise was to have clarity on the obligations of owners of troubled firms. “We are in discussion with the ministry and are working on some models wherein the promoter’s commitment towards restructuring will be very clearly established,” said Kamath, who also heads the second-largest public sector bank Punjab National Bank.

If there is a consensus on the new rules, they will become a part of future corporate debt restructuring (CDR) packages. The main element of the new rules is the requirement for promoters to pledge 40% of their shareholding. Moreover, there will be specific goalposts that promoters will have to meet, failing which they face the prospect of losing control over their firms.
Companies failing to meet loan recast deadline may have to cede control
The finance ministry is strongly against banks converting debt into equity in case of companies that are facing financial problems because of management failures. “If they (owners) are not performing their jobs efficiently, someone else needs to take over. And, if the company looks beyond the point of salvaging, then its assets will be stripped off and sold lock, stock and barrel,” said the finance ministry official quoted earlier.

“We are not only talking about wilful defaulters, but also those promoters who are inefficient,” said the official. To be sure, the requirement that owners have to pledge their shares is not new. In case of Kingfisher Airlines, the entire holding of the owner, Vijay Mallya, was pledged with lenders.

That proved to be of little consequence as banks never attempted to force a change in management. The airline shut down late last year and the debt of Rs 7,000 crore looks irretrievable. Banks also took a stake in Kingfisher, though these holdings are now almost worthless.

So far, banks have approved CDR packages for 415 companies, with total debt of Rs 2,50,000 crore as on June 30. Usually, firms under CDR get more time to repay loans and/or a lower rate of interest. The finance ministry’s tough stand comes at a time non-performing loans of public sector banks have risen to 3.84% of advances at the end of March 2013 from 2.32% in March 2011. According to a report by rating agency ICRA, fresh NPAs of PSBs rose sharply to 4.2% in Q1, 2014, which is 120 basis points higher than 2012-13 levels.

Earlier, Finance Minister P Chidambaram had said banks need to be strict with wilful defaulters while being sympathetic towards genuine defaulters.

“Genuine defaulters and wilful defaulters need to be dealt with separately. We have to be strict with wilful defaulters,” he had said in his address to the Parliamentary Consultative Committee attached to his ministry. The finance ministry had then reiterated Chidambaram’s stand and cautioned that banks will take strict action against wilful defaulters.

Last month, Takru had warned that promoters who are wilful defaulters are likely to lose control or management of their companies. “If the companies don’t shape up, they should ship out,” he had said.

The finance ministry has been pushing banks to focus on their top 30 NPAs. As on March 2013, top 30 NPAs of state-run banks are worth Rs 61,123 crore and constitute for 39.7% of their gross NPAs.

Source – Economic Times


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