Sdr (strategic debt restructuring)
This query is : Resolved
31 July 2015
what is SDR and how it's works in the industry
01 August 2015
'Debt Restructuring' A method used by companies with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage.
01 August 2015
The Strategic Debt Restructuring Rules by RBI – Banks Will Convert Debt to Majority Equity
There’s a new law in town. It’s a Strategic Debt Restructuring proposal by RBI.
It’s kinda boring to go through the whole thing. But at Capital Mind, we think there’s no harm trying. So, here’s the gist.
When companies can’t repay their loans, the banks take “sacrifices” to restructure the loans. Some might be in terms of a late payment, others in the form of lower interest rates or forgiven principal.
Many companies, despite such sacrifices by banks, don’t rejuvenate themselves because of inefficient management.
In some other cases, companies don’t meet the milestones they agree to in the loan restructuring agreement.
RBI has decided to ensure that in these above cases, banks can change the ownership and management of the companies whose loans are restructured.
Woohoo! How can banks change ownership?
When banks restructure any future loans, they have to put a clause telling the promoters that “we will convert our loan to shares in case you don’t meet your commitments”. And they put milestones and critical conditions to mark the progress.
Companies will need to get authorization for this through a special resolution (since doing the above will dilute existing shareholders) before they restructuring.
Such a mandate means the lenders get majority (51%) ownership.
Banks cannot restructure loans without such authorization. It’s mandatory.
If the company doesn’t meet the milestones or critical conditions, the Joint Lenders Forum should meet, and decide within 30 days whether or not to take over the company by converting their loans to a majority shareholding.
Then the banks get another 90 days to approve the conversion.
Then they get a FURTHER 90 days to actually convert the loan to shares.
What happens after that?
Typically, we expect panic. But apparently, things are more subdued nowadays. So we hitchhike our way forward.
Banks get to hold the NPA (or non-NPA) status of the loan for another 18 months while they scratch their heads about what to do.
They could sell to another promoter. In which case, the loan is upgraded to Standard but banks have to keep the provisions on until the loan starts to perform again.
They could sell the shares some other way. We don’t really know how just yet. But I suppose dumping shares in the market is a way.
At What Price Do Banks Convert?
The lower of:
If there’s a market value, then at the 10 day average price in the market.
Book value after ignoring any revaluation reserves.
The price can’t be lower than the face value of the share.
No need for an open offer to other shareholders, as there is an exemption under these rules.
This face value restriction is odd, since many shares like 3i Infotech are listed below their face value. (Rs. 3 for a stock whose face value is Rs. 10)
Will Banks Get 51%?
But this is a little zany; it’s not apparent banks will get 51% if they use this price formula. What if the company’s loan amount is 1000 cr. and the book value is Rs. 2000 cr, divided into 10 crore shares. (Assume the market value is higher)
That means a price of Rs. 200 per share for which they get 5 cr. shares. Now the total is: 10 cr shares held by earlier shareholders, 5 cr. shares held by the banks – so banks hold 5 cr. shares out of 15 cr. shares total. That’s 33%. How do they get to 51%?
If they choose an even lower price, they would violate this regulation. If they don’t, they don’t get 51%. Something’s gotta give.
Some Restrictions
Provisions continue to be applied for 18 months
There’s no special mark to market rules for shares owned this way (for banks)
A single bank can’t own more than 30% of any company.
Our View
This is all very good in theory, but we’d like to see this work out in reality. Can you really kick out promoters in India? Will the remaining people do the bidding of the banks?
What about unions? Will they not protest the change in “inefficiency” which might simply be the handing out of large pensions or bonuses?
What about other shareholders and financiers? Will they just allow banks to take over a company without their claims being addressed?
Will banks ever even use this clause? Because if they really wanted to sell shares of a company or take over management, they could do so by converting pledged shares itself. They have hardly ever done that, even in big default cases like Deccan Chronicle. Even in the Kingfisher case, the big banks never sold the stock they were pledged, even though it was clear Mallya wasn’t going to return anything. If banks don’t want to do that when they clearly can own the shares, will they do it just because RBI has some rules set up?
The answer will be evident after the first such episode. While the regulations are good, they are only an enabling provision, for lazy bankers who need the rules specified in excruciating detail before they actually go out and act. Which is why we get the micro-management crap like 30 days to say we’ll take over, 90 more days to approve a takeover and then another 90 days to actually take over. (If you left it to bankers, they’ll never do it in any viable time frame, apparently)
Overall, we aren’t enthused. But we expect a lot of defaults going forward, so banks will have ample opportunities to use the Strategic Debt Restructure and prove to us that while they can’t run their own banks that well, they might actually be able to run the businesses they lend to.
There’s a new law in town. It’s a Strategic Debt Restructuring proposal by RBI.
It’s kinda boring to go through the whole thing. But at Capital Mind, we think there’s no harm trying. So, here’s the gist.
When companies can’t repay their loans, the banks take “sacrifices” to restructure the loans. Some might be in terms of a late payment, others in the form of lower interest rates or forgiven principal.
Many companies, despite such sacrifices by banks, don’t rejuvenate themselves because of inefficient management.
In some other cases, companies don’t meet the milestones they agree to in the loan restructuring agreement.
RBI has decided to ensure that in these above cases, banks can change the ownership and management of the companies whose loans are restructured.
Woohoo! How can banks change ownership?
When banks restructure any future loans, they have to put a clause telling the promoters that “we will convert our loan to shares in case you don’t meet your commitments”. And they put milestones and critical conditions to mark the progress.
Companies will need to get authorization for this through a special resolution (since doing the above will dilute existing shareholders) before they restructuring.
Such a mandate means the lenders get majority (51%) ownership.
Banks cannot restructure loans without such authorization. It’s mandatory.
If the company doesn’t meet the milestones or critical conditions, the Joint Lenders Forum should meet, and decide within 30 days whether or not to take over the company by converting their loans to a majority shareholding.
Then the banks get another 90 days to approve the conversion.
Then they get a FURTHER 90 days to actually convert the loan to shares.
What happens after that?
Typically, we expect panic. But apparently, things are more subdued nowadays. So we hitchhike our way forward.
Banks get to hold the NPA (or non-NPA) status of the loan for another 18 months while they scratch their heads about what to do.
They could sell to another promoter. In which case, the loan is upgraded to Standard but banks have to keep the provisions on until the loan starts to perform again.
They could sell the shares some other way. We don’t really know how just yet. But I suppose dumping shares in the market is a way.
At What Price Do Banks Convert?
The lower of:
If there’s a market value, then at the 10 day average price in the market.
Book value after ignoring any revaluation reserves.
The price can’t be lower than the face value of the share.
No need for an open offer to other shareholders, as there is an exemption under these rules.
This face value restriction is odd, since many shares like 3i Infotech are listed below their face value. (Rs. 3 for a stock whose face value is Rs. 10)
Will Banks Get 51%?
But this is a little zany; it’s not apparent banks will get 51% if they use this price formula. What if the company’s loan amount is 1000 cr. and the book value is Rs. 2000 cr, divided into 10 crore shares. (Assume the market value is higher)
That means a price of Rs. 200 per share for which they get 5 cr. shares. Now the total is: 10 cr shares held by earlier shareholders, 5 cr. shares held by the banks – so banks hold 5 cr. shares out of 15 cr. shares total. That’s 33%. How do they get to 51%?
If they choose an even lower price, they would violate this regulation. If they don’t, they don’t get 51%. Something’s gotta give.
Some Restrictions
Provisions continue to be applied for 18 months
There’s no special mark to market rules for shares owned this way (for banks)
A single bank can’t own more than 30% of any company.
Our View
This is all very good in theory, but we’d like to see this work out in reality. Can you really kick out promoters in India? Will the remaining people do the bidding of the banks?
What about unions? Will they not protest the change in “inefficiency” which might simply be the handing out of large pensions or bonuses?
What about other shareholders and financiers? Will they just allow banks to take over a company without their claims being addressed?
Will banks ever even use this clause? Because if they really wanted to sell shares of a company or take over management, they could do so by converting pledged shares itself. They have hardly ever done that, even in big default cases like Deccan Chronicle. Even in the Kingfisher case, the big banks never sold the stock they were pledged, even though it was clear Mallya wasn’t going to return anything. If banks don’t want to do that when they clearly can own the shares, will they do it just because RBI has some rules set up?
The answer will be evident after the first such episode. While the regulations are good, they are only an enabling provision, for lazy bankers who need the rules specified in excruciating detail before they actually go out and act. Which is why we get the micro-management crap like 30 days to say we’ll take over, 90 more days to approve a takeover and then another 90 days to actually take over. (If you left it to bankers, they’ll never do it in any viable time frame, apparently)
Overall, we aren’t enthused. But we expect a lot of defaults going forward, so banks will have ample opportunities to use the Strategic Debt Restructure and prove to us that while they can’t run their own banks that well, they might actually be able to run the businesses they lend to.
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