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Promoters will now have to shell out more for corporate debt restructuring

MUMBAI: Promoters will have to invest more of their own funds to demonstrate commitment to their business if they want banks to restructure loans, said two people familiar with the matter. Also, lenders will get a seat on the board of some companies to monitor their progress.

Lenders, hit by restructuring of loans worth thousands of crores of rupees, are plugging loopholes in the so-called corporate debt restructuring, or CDR, programme that enabled some to short change banks by getting liberal repayment terms without sharing the pain.

In a meeting of top bankers on Monday, it was decided to raise promoters’ equity contribution in relation to the revenue sacrificed by the lenders. Now on, incompetent promoters who have siphoned off funds have to bring in 20% to 25% of the amount sacrificed by the lenders as equity, up from 15% now, those people said. Promoters may have to pledge their entire holding and even provide personal guarantees.

Bankers are tightening the standards to help a company get bail-out packages without getting branded as a defaulter following mounting criticism that the CDR platform, designed to help companies affected by external factors, is being abused. The government, the owner of a majority of the banks and which itself is struggling for funds, is driving banks to ensure that funds go only to the deserving.

“CDR should only be taken where the slippages have been for reasons beyond the control of the management of the company,” the finance ministry had recently written to the CDR cell. If “CDR is done in cases that have been spoilt due to the incompetence of the management or where diversion or misuse of funds has taken place, change of management must be the first option”.

Bankers have suggested that at least two nominee directors should be on the board of such companies and lenders would also appoint a financial controller to avoid misuse of funds when banks are taking a huge haircut to revive companies. But the promoters’ commitment could increase with stake pledges and guarantees.

Promoters are pledging their stake now. However, it is not their entire stake. Not all promoters have agreed to personal guarantees. In fact, there have been cases, like that of telecom tower operator GTL involving restructuring of Rs 16,200-crore loan, where promoters have incorporated a force majeure clause that says the guarantee cannot be invoked in unusual circumstances.

However, bankers felt that on occasions where the slippages have been for reasons beyond the control of the management of the company, the banks would resist from seeking upfront contribution from promoters.

On conversion of debt into low-yielding securities – an instrument criticised by the finance ministry on grounds that banks have to take a huge haircut on it – bankers decided that they would insist on converting debt into equity of listed companies instead of subscribing to deep discount bonds.

Since the inception of the CDR mechanism, loans close to Rs 1.50 lakh crore of 292 companies have been restructured.

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Posted by on May 22 2012. Filed under Business India News. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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