The decision of market regulator Securities and Exchange Board of India (Sebi) to allow lenders to convert part or all of their debt into equity in case of defaults will help banks reduce their bad assets, SBI MD P Pradeep Kumar told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy.
“We had been requesting this for long,” he said.
According to the decision taken at a Sebi board meeting yesterday, banks can now swap their bad debts for equity without adhering to strict guidelines that are usually outlined takeover, such as pricing equity at historical market price or tendering an open offer for minority shareholders.
The regulator said it would later publish an equity pricing formula for such conversions based upon face value or fair value instead of historical market price.
Below is the transcript of the interview on CNBC-TV18.
Latha: What does this mean for banks? Was this the one reason why you were not able to convert debt into equity and take over bad assets?
A: We have been requesting Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) for this enablement. The Sebi takeover code had a pricing for the conversion of our debts or interest into equity for listed companies as the higher of average of the last six months or the last fortnight. This we thought was not the right conversion price for debt or interest for stressed companies.
So, we had been requesting the RBI to intervene with Sebi for changing this formula which we thought was in the favour of the minority shareholders but not in the interest of the financial institutions.
We will have to see the fine print, what are all the details for the conversion but that is what I have seen is that it will be either at face value, at fair value. This will enable banks to convert in a stressed company to convert their debt or interest into equity.
Latha: It says you can’t go below face value as well it says that banks have to take over at least 51 percent of the equity. Does that restrict the number of cases?
A: It does restrict. Whether it is restrictive below 51 percent or you should have 51 percent prior to the conversion I was not too sure. We will have to wait for the guidelines. If we have to get the minimum of 51 percent it could be slightly difficult; there will be many cases before conversion where we will not have a very high percentage of shares pledged with us.
Sonia: Since we don’t have the final guidelines do you have any indication of how these new norms will help alleviate the non performing asset (NPA) issues or the stressed assets issues?
A: There will be no immediate effect. It will give us an ability to convert maybe at the right price. When we are able to convert at right price perhaps the lenders will have close to 51 percent and it will be easy to lookout for a buyer who will be interested in this stressed asset which we are not able to do right now.
Latha: I was speaking to a bunch of bankers over the weekend and they were pretty disturbed by the prices for coal as well as the trend that will become evident for all mines, all minerals. They were worried that a lot of power companies will now even those otherwise able to pay their loans may not be able to. Do you fear that this specifically will push more power companies into non performing loans (NPLs)?
A: We have to look at each company separately because each company has a bid different at rates. We have been talking to all the major companies which have won the coal blocks. So, as of now we don’t have any great fear of additional stress in the power portfolio which we have. However, we have not had discussions with all the companies; we will have to wait and see how the coal prices will affect the ability of the companies to repay.
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