SEBI, in its Board Meeting dated 22 March, 2015 approved a proposal to ease the process of debt to equity conversion for lending institutions in cases where their listed borrower companies are in distress. SEBI seeks to exempt such conversions from the applicability of certain provisions under the SEBI (ICDR) Regulations, 2009 and the SEBI (SAST) Regulations, 2011. This would be done by diluting the pricing guidelines. Currently, the minimum conversion price has to be the higher of the 26-week or the 2-week volume weighted average price of the stock from the relevant date. A minimum conversion price for a company in distress, discouraged lenders from taking up equity as there was a fear of further erosion of capital with a subsequent fall in the share price. As per the new norms, conversion would happen at a “fair price” not being less than the face value of the shares. This change was necessary. However, a minimum floor price of par value may act as a dampner for many highly distressed situations.

SEBI’s decision is well-intended to revive distressed listed companies and provide more flexibility to the lending institutions to acquire control over the companies in the process of restructuring. It would benefit lenders and borrowers alike. Total NPAs for banks as on December 2014 was close to Rs. 3,00,000 crores. Easier conversion norms will not only help banks, especially public sector banks to clean up NPAs, but also reduce interest burdens for companies in distress. Although, the formal notification is awaited, the conversion price would now primarily be decided as per the negotiations between the lender and the borrower. Concerns regarding further litigation on grounds of unequal bargaining power in such negotiations cannot be ruled out. Further, an open offer exemption under the SEBI (SAST) Regulations, 2011 is expected and this would substantially lower the cost of conversion for banks.

Although this change would tempt banks to convert, certain concerns cannot be ignored – can conversion ensure the revival of a company? How far can banks walk in the shoes of a promoter / substantial shareholder? Would banks have the requisite skill to participate in the management of a company? What happens to the management when the banks want to exit?

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Date:September 28, 2015