(Image source from: RBI announces new measures on debt restructuring})

The Reserve Bank of India (RBI) has announced fresh guidelines to enable commercial banks to acquire a majority stake in the companies that are unable to repay loans and has come under the strategic debt restructuring (SDR) scheme. The measures are aimed to provide banks with a more flexible process to recover bad loans, which have been mounting in recent months.

According to the new guidelines, banks that decide to recast a company's debt under the SDR scheme must hold 51 percent or more of the equity after the debt-for-share conversion. Banks will be allowed to convert the debt to equity within 30 days of the review of the company's accounts.

The RBI circular states that the general principle of restructuring should be that shareholders have to bear the first loss rather than the debt holders. With this principle in view and to ensure more 'skin in the game' of promoters, JLF or the corporate debt restructuring cell (CDR) will consider the possibility of transferring the equity of the company by promoters to lenders to compensate for their sacrifices.

Promoters must consider infusing more equity into their companies. Banks will have to consider the option of transferring promoters' holdings to a security trustee or an escrow arrangement till the turnaround of the company.

By Premji