BE/RBI/43/2017
The Reserve Bank of India had notified the following conditions on Conversion of Debt in to Equity.
a) Securitisation Companies / Reconstruction Companies (SC/RCs) are permitted to convert a portion of debt into shares of the borrower company as a measure of asset reconstruction provided their shareholding does not exceed 26% of the post converted equity of the company under reconstruction
b) Securitisation Companies / Reconstruction Companies (SC/RCs) are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors holding not less than 60% of the amount outstanding to a borrower as against 75% hitherto.
Now while reviewing the shareholding of the post converted equity of the borrower company under reconstruction by Asset Reconstruction Companies (ARCs), RBI has decided to exempt ARCs meeting the criteria set out with a cap of 26% subject to compliance with the provisions of the SARFAESI Act, 2002, and the various guidelines/ Instructions issued by Reserve Bank of India from time to time as applicable to ARCs as well as Foreign Exchange Management Act, 1999, Reserve Bank of India Act, 1934, Companies Act, 2013, SEBI Regulations and other relevant Statutes. The extent of shareholding post conversion of debt into equity shall be in accordance with permissible Foreign Direct Investment (FDI) limit for that specific sector.
Further, the RBI release adds that ARCs that meet the conditions mentioned below are exempted from the limit of shareholding at 26% of post converted equity of the borrower company:
- The ARC shall be in compliance with Net Owned Fund (NOF) requirement of ₹ 100 crore on an ongoing basis;
- At least half of the Board of Directors of the ARC comprises of independent directors;
- The ARC shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion;
- The equity shares acquired under the scheme shall be periodically valued and marked to market. The frequency of valuation shall be at least once in a month.
Further, the ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which could be considered for managing the companies.
If I have taken Debts of Sick company through ARC. Then also I can make my debts into equities as per RBI guidelines.
In simple terms we can say that Debt-to-equity swaps are common transactions in the financial world. They enable a borrower to transform loans into shares of stock or equity. Most commonly, a financial institution such as an insurer or a bank will hold the new shares after the original debt is transformed into equity shares.
ARCs or Asset Reconstruction companies are those who take over the bad loans of banks which are under NPA. The Reserve Bank of India (RBI) has allowed Asset Reconstruction Companies (ARCs) to hold more than 26% post conversion of debt into equity in companies undergoing restructuring (wherein the restructure of the
In a notification, the central bank said the extent of shareholding post conversion will be in accordance with permissible foreign direct investment (FDI) limit for that specific sector. This means this should be in line with the permitted FDI investment percentage.
RBI also said that ARCs should maintain net owned fund (NOF) of Rs100 crore on an on-going basis. In April this year, the central bank had raised the minimum net owned funds for ARCs from Rs 2 crore to Rs100 crore by March 2019. The ARCs should also do a monthly valuation of the equity shares acquired from defaulting companies and also mark them to market.
The notification further added that the ARCs shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising a majority of independent directors for taking decisions on proposals of debt to equity conversion.
RBI also said that ARCs should have at least half of the board members as independent directors to be eligible for exemption from shareholding limit.
Mr. Siby Antony, Chairman, Edelweiss ARC felt that this is a long pending demand from ARCs. They can now go up to 51% post conversion of debt into equity.
Note: The major advantage of converting debt to equity in accounting is that the cash raised doesn’t have to be paid back. That’s a major reason why companies convert debt to equity since the amount is available to the business on a permanent basis.
Hello,
If holding company wants to convert its debts in subsidiary company can it do so?
Which form need to be filed with RBI?
The question here arises that whether the holding companies are liable for debts incurred by subsidiary companies, and if so, whether they are permitted to converts its debts. The reply to this as under.
In certain circumstances, a holding company may be liable for debts incurred by a subsidiary company when the subsidiary company could not pay its debts. If the directors of the holding company were aware of, or should have been aware of, the insolvency, then the holding company may be liable for the debt.
From the above we can infer that there are also other situations when the holding company will not be liable to hold the shares of subsidiary companies in which case the holding company being liable for the debts of subsidiary company does not arise.
Let us assume that without applying any exception in the normal course the holding company is liable to hold the debts of subsidiary company and in that they will be permitted to convert the debts in the subsidiary company which is obvious. In that case the debt portion is obviously treated as a commercial borrowing.
1. RBI guidelines state that in case of full conversion of ECB (External Commercial borrowings) into equity, the company shall report the conversion in form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, within seven working days from the close of month to which it relates.
For further details one should go to RBI site and be guided accordingly.