RBI Prudential Norms on Change in Ownership of Borrowing Entities

The Reserve Bank of India would allow banks to convert the status of their “stressed” loans to a company into “standard” ones if the entity is sold to a new major stakeholder.

• This decision will give banks more flexibility to bring in a change in ownership of borrowing entities which are under stress primarily due to operational or managerial inefficiencies despite substantial sacrifices made by the lending banks.

CHANGE IN OWNERSHIP SUBJECT TO FOLLOWING CONDITIONS

• New promoter should not be a person/entity/subsidiary/associate (domestic as well as overseas), belonging to the existing promoter/promoter group.
• The new promoter should have acquired at least 51% of the paid up equity capital of the borrower company.
• If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51% then the new promoter should own at least 26% of the paid up equity capital or up to applicable foreign investment limit, whichever is higher.
• At the time of takeover of the borrowing entity by a new promoter banks are allowed to refinance the existing debt of the borrowing entities, considering the changed risk profile, without treating the exercise as restructuring
• Provisions held against the said account can be reversed if the outstanding loan facilities of the borrowing entities perform satisfactorily during the specified period

This permission of upgradation of credit facilities extended to borrowing entities upon a change in ownership given to banks is applicable only if the ownership has been changed outside “Strategic Debt Restructuring Scheme”.

STRATEGIC DEBT RESTRUCTURING SCHEME (SDR)
It gives lenders the right to convert their outstanding loans into a majority equity stake if the borrower fails to meet conditions stipulated under the restructuring package.