The conversion price of the equity shall be determined as per the guidelines given below:
(i) Conversion of outstanding debt (principal as well as unpaid interest) into equity instruments should be at a ‘Fair Value’ which will not exceed thelowest of the following, subject to the floor of ‘Face Value’ (restriction under section 53 of the Companies Act, 2013):
a) Market value (for listed companies): Average of the closing prices of the instrument on a recognized stock exchange during the ten trading days preceding the ‘reference date’ indicated at (ii) below;
b) Break-up value: Book value per share to be calculated from the company’s latest audited balance sheet (without considering ‘revaluation reserves’, if any) adjusted for cash flows and financials post the earlier restructuring; the balance sheet should not be more than a year old. In case the latest balance sheet is not available this break-up
value shall be Re.1.
(ii) The above Fair Value will be decided at a ‘reference date’ which is the date of JLF’s decision to undertake SDR.
The above pricing formula under Strategic Debt Restructuring Scheme has been exempted from the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2009 subject to certain conditions, in terms of SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2015 notified vide the Gazette of India Extraordinary Part–III–Section 4, published on May 5, 2015. Further, in the case of listed companies, the acquiring lender on account of conversion of debt into equity under SDR will also be exempted from the obligation to make an open offer under regulation 3 and regulation 4 of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 in terms of SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2015. This has been notified vide the Gazette of India Extraordinary Part–III–Section 4 published on May 05, 2015.
Banks should adhere to all the prescribed conditions by SEBI in this regard.
In addition to conversion of debt into equity under SDR, banks may also convert their debt into equity at the time of restructuring of credit facilities under the extant restructuring guidelines. However, exemption from regulations of SEBI, as detailed in paragraph 2.224 above, shall be subject to adhering to the guidelines stipulated in the above paragraphs.
Acquisition of shares due to such conversion will be exempted from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para- Banking activities and intra-group exposure. However, this will require reporting to RBI (reporting to DBS, CO every month along with the regular DSB Return on Asset Quality) and disclosure by banks in the Notes to Accounts in Annual Financial Statements. Equity shares of entities acquired by the banks under SDR shall be assigned a 150% risk weight for a period of 18 months from the ‘reference date’ indicated in paragraph 2.223(ii). After 18 months from the ‘reference date’, these shares shall be assigned risk weights as per the extant capital adequacy regulations.
Equity shares acquired and held by banks under the scheme shall be exempt from the requirement of periodic mark-to-market (stipulated vide Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks) for the 18 month period indicated at para 2.222(xi).
Conversion of debt into equity in an enterprise by a bank may result in the bank holding more than 20% of voting power, which will normally result in an investor-associate relationship under applicable accounting standards. However, as the lender acquires such voting power in the borrower entity in satisfaction of its advances under the SDR, and the rights exercised by the lenders are more protective in nature and not participative, such investment may not be treated as investment in associate in terms of paragraph 10.2.3 of Annexure to circular DBOD.No.BP.BC.89/21.04.018/2002-03 dated March 29, 2003 on ‘Guidelines on Compliance with Accounting Standards (AS) by Banks’.
With reference to the provisions contained in circular DBR.BP.BC.No. 101/21.04.132/2014-15 dated June 8, 2015 on “Strategic Debt Restructuring”, it is advised that in cases of failure of rectification or restructuring as a CAP as decided by JLF in terms of paragraph 3 of circular DBOD.BP.BC.No.97/21.04.132/2013-14 dated February 26, 2014, JLF will have the option to initiate SDR to effect change of management of the borrower company subject to compliance with the conditions as stated above.