RBI tweaks SDR norms to revitalise stressed assetshttps://indianexpress.com/article/business/business-others/rbi-tweaks-sdr-norms-to-revitalise-stressed-assets/

RBI tweaks SDR norms to revitalise stressed assets

Banks asked to provide at least 15% of their residual loan to a company in debt-to-equity swaps.

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At present equity shares acquired and held by banks under the scheme are exempt from the requirement of periodic mark-to-market.

The Reserve Bank of India (RBI) on Thursday told banks to provide at least 15 per cent of their residual loan to a company while converting debt to equity under the strategic debt restructuring (SDR) norms, by the end of the 18-month period from the reference date.

The central bank said that, it is possible that lenders may not be able to sell their stake to new promoters within 18 months thus revoking the stand-still classification benefit, resulting in sharp deterioration in the classification of their remaining loan exposures.

“The required provision should be made in equal installments over the four quarters,” it said, adding that the provision could be reversed only when all the outstanding loans in the account perform satisfactorily during the ‘specified period’ after transfer of ownership/management control to new promoters.

At present equity shares acquired and held by banks under the scheme are exempt from the requirement of periodic mark-to-market. Noting that there is a possibility of banks facing a cliff-effect of provisioning at the end of the 18 month period on account of mark-to-market requirement or on account of recognising loss on sale of equity shares to the new promoters, RBI asked banks to periodically value and provide for depreciation of these equity shares as per IRAC norms for investment portfolio. “Banks will, however, have the option of distributing the depreciation on equity shares acquired under SDR, over a maximum of four calendar quarters from the date of conversion of debt into equity,” it said.

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It has also allowed banks the asset classification benefit provided they divest a minimum of 26 per cent of the shares of the company (from 51 per cent earlier) to the new promoters within 18 months and the new promoters take over management control. “Lenders would thus have the option to exit their remaining holdings gradually, with upside as the company turns around. Lenders should, however, grant the new promoters the ‘Right of First Refusal’ for the subsequent divestment of their remaining stake,” it explained.

Currently, JLFs are required to adhere to certain prescribed timelines during SDR process. The central bank has allowed JLFs flexibility in the time taken for completion of individual activities up to conversion of debt into equity in favour of lenders (up to 210 days from the review of achievement of milestones).

The central bank said that the pricing formula under SDR has been exempted from the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations subject to certain conditions. Further, in the case of listed companies, the acquiring lender on account of conversion of debt into equity under SDR has also been exempted from the obligation to make an open offer. “Accordingly, it is clarified that the SDR framework will also be available to an ARC, which is a member of the JLF undertaking SDR of a borrower company,” it added. Reviewing a separate guideline on joint lenders’ forum (JLF), RBI said that the proportion of lenders, by number, required for approving the corrective action plan (CAP) has been reduced to 50 per cent. At present, decisions on the corrective action plan (CAP) must be approved by a minimum of 75 per cent of creditors by value and 60 per cent of creditors by number in the JLF.

RBI to infuse Rs 12K cr liquidity via OMOs

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Mumbai: The RBI on Thursday announced an open market operation (OMO) purchase of government securities worth Rs12,000 crore on March 3. The RBI conducts OMO purchases to infuse liquidity into the system whenever there is a deficiency, while it conducts OMO sales to suck excess liquidity from the system. OMOs are also intended to keep the short-term interest rates close to the policy rates. “The Reserve Bank will continuously monitor the evolving liquidity conditions and announce such measures as considered necessary,” the central bank said. A BofAML report states that yields are rising, despite RBI rate cuts, because delays in RBI OMO have generated excess supply in the G-sec market.  ENS