The Reserve Bank of India (RBI) has released a strict strategic debt restructuring (SDR) scheme that will give banks the right to seize control of a company if a debt recast fails, replace the management and sell stake in the defaulting company to recover dues.
India’s central bank’s step is aimed at controlling rising bad loans and failure of restructured loans.
In case a bank decides to recast a company’s debt under the scheme, it will be required to own 51% or more of the equity after the debt-for-share conversion.
The joint lenders forum (JLF) will be responsible for taking the decision on invoking the SDR by converting the whole or a part of the loan to equity shares within 30 days from the review of the account, RBI said in a statement.
A minimum of 75% of creditors by value and 60% of creditors by number will need to approve the decision.
With the help of the new rules, banks might be able to decrease their load of high provisioning as selling their stake in defaulting companies, the money set aside by banks for covering bad loans will be written back, reported Mint.
But the central bank has put in a condition before the banks seize control, as per which, lenders are required to find professional management to run the company and monitor its progress on repayment obligations.
"JLF should closely monitor the performance of the company and consider appointing suitable professional management to run the affairs of the company," the statement said.