Sebi Gives Lenders New Ammunition To Tackle Bad Loans
BENGALURU: Capital market regulator Securities and Exchange Board of India has made it easier for financial institutions to convert debt of a listed borrower into equity.
The move is part of the government's and the Reserve Bank of India’s efforts to clamp down on the bad loans in the banking system. The stressed assets in the banking system is now more than 10 percent of the total outstanding loans.
Converting debt into equity is one of the popular mechanisms to address the bad loan problem. However, the conversion price for such transactions works out to be very high, often making this an unviable option for lenders. This is because the price for converting debt into equity is construed as preferential allotment and has to be arrived at as per the Sebi formula.
As per Sebi guidelines, the price has to be the higher of either the average weekly high and low of the closing price during six months preceding the allotment or average of weekly high or low of the closing prices during the preceding two weeks.
The price derived from this formula has often thwarted lenders' efforts to recast debt of defaulting borrowers. For instance, in 2011, lenders to Kingfisher Airlines had to convert debt amounting to 
1,400 crore into equity at a 60 percent premium to the then prevailing market rate.
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