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It's Time Debt-ridden Infra Firms Free up Pledged Shares with RBI Tweaking Norms

Published: 10th March 2015 06:00 AM  |   Last Updated: 10th March 2015 03:37 AM   |  A+A-

HYDERABAD: Infrastructure companies need to pony up cash and very soon at that, with the Reserve Bank of India firming up guidelines to facilitate banks for easy conversion of debt into equity.

Several companies including GMR Group, IVRCL Ltd, Gayatri Projects and Lanco Infratech not only have a staggering debt to service, but a majority of the promoter’s stake has been pledged.

While for debt, they are opting for Corporate Debt Restructuring (CDR), the need to free up encumbered shares, is more pronounced in the wake of the upcoming guidelines to retain ownership.

Some companies have pledged an alarming proportion of the promoter stake with lenders. For instance, as on December 2014, IVRCL has pledged 100 per cent of its 10.64 per cent promoter stake, while promoters of Gayatri Projects counts 99.84 per cent encumbered shares of the total 50.32 per cent promoter stake. Similarly, GMR has pledged 78.85 per cent of the promoter’s 64.83 per cent, Lanco 92.83 per cent of the promoter shareholding and Ramky 57.14 of the 67.76% promoter stake.

“Our encumbered shares with financial institutions basically serves as a collateral for lenders. We have to wait and see the guidelines allowing conversion of pledged shares into equity,” T Sandeep Reddy, MD, Gayatri Projects told Express.

According to M Gautam Reddy, MD, Ramky Group, conversion of debt into equity is already happening when companies execute the CDR package. “The proposed guidelines will not overlap with CDR norms, but will put adequate pressure on promoters to perform better,” he said.

In its January 28 policy review, the RBI said it was consulting SEBI for waiver of compliance with the prevailing ICDR and SAST Regulations.

According to Section 19(2) of the Banking Regulation Act 1949, banks are allowed to hold shares in a company, whether as pledgee, mortgagee or absolute owner. Banks can also acquire shares of a borrowing company by converting debt into equity, following prudential guidelines on restructuring of advances by banks and financial institutions. However, acquisition of shares in listed companies by conversion of debt or by any other means has to conform with ICDR and SAST regulations.

“Very often, the share prices of companies whose debt is being restructured, in accordance with the stipulations of ICDR Regulations are found to be not in consonance with their intrinsic value. This results in upfront allocation of disproportionate share of loss on restructuring to banks,” said the RBI. The proposed norms are expected in 3 months.

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