Mumbai, June 19, 2017
The Securities and Exchange Board of India (Sebi) is set to ease rules of acquisition to make it more attractive for investors to buy distressed companies from banks amid the renewed push to resolve banks’ bad loan burden by the government and the Reserve Bank of India (RBI).
The regulator has been granting exemptions to banks acquiring the stock of listed distressed companies. This includes relaxing the pricing formula for making an open offer to public shareholders and lock-in requirements, among other things.
The regulator has received feedback that such exemptions need to be extended to other prospective buyers as well. The Sebi board, which is set to meet on June 21, is likely to discuss this proposal as well as tighter rules on participatory notes (P-Notes).
“RBI has been in consultation with Sebi on dealing with distressed companies,” said a person familiar with the development. “Now the issue is these exemptions stop with the banks. It needs to be extended to prospective investors as well.”
The government and regulators have taken several measures to tackle the banking sector nonperforming asset (NPA) problem. Banks have been advised by RBI to reduce NPAs and initiate stringent actions to recover dues from borrowers.
Bad loans at state-run banks have increased by more than Rs 1lakh crore since April 2016 to Rs 6 lakh crore as of December 31. This goes up to Rs 10 lakh crore when those of private and other lenders are added. Twelve of the worst accounts, which account for about 25% of the current gross NPAs, were identified last week by RBI for bankruptcy proceedings.
Lawyers said this is an area that has long needed attention. Earlier regulations had a chapter for financially weak companies but not a single acquisition could be made under them. Now that the framework for taking over an insolvent company is clear and set out in law, with the Insolvency and Bankruptcy Code, exemptions for acquisitions pursuant to resolution and bankruptcy should be provided.
“Restricting exemptions in the hands of banks won't be enough. The incoming acquirer needs it to enable funds to be infused into the company rather than get paid to shareholders,” said Somasekhar Sundaresan, a lawyer specialising in securities law.
Fees on FPIs issuing P-Notes
“Sebi must also revive the dialogue on ‘whitewash provisions,’ whereby shareholders can approve a waiver of an open offer which is meant for them and must be capable of being waived by them.”
Banks are not turnaround specialists, an expert pointed out, adding, they have to recover their money and for that they have to sell it to prospective investors who have the expertise.
“Distressed asset resolution is the need of the hour,” said Nishant Parikh, partner and head of corporate, Trilegal. “Sebi’s exemption to prospective buyers will be a step in the right direction. If the choice is between protecting the interests of public shareholders by providing an exit option, and reviving the company, the latter has to be the priority.”
Tighter P-note rules
Sebi had last month proposed to ban P-Notes from being issued against derivatives for speculative purposes except for hedging over concerns that they may be used as an avenue for roundtripping of funds to evade the crackdown on black money. Not everyone is happy with this.
“Taking out derivatives from the basket of securities on which ODI (offshore derivative instruments) can be issued, again it appears to put this product at a disadvantage to FPIs (foreign portfolio investors) and also in effect increases the cost of investing in India for overseas investors,” said Siddharth Shah, partner, Khaitan & Co.
The regulator also proposes to levy fees on FPIs issuing P-Notes and the group entities of such FPIs, which may be involved in taking underlying positions in the Indian securities market. “Fundamentally, the proposal to recover costs for additional monitoring may be justified in a way, but the approach could have been to recover this in a more simpler and business-friendly way possibly by imposing some additional annual fee from the issuer FPI rather than trying to link this to each ODI issuance,” Shah said.
[The Economic Times]