Sebi issues rules for banks to convert bad loans to equity

The Securities and Exchange Board of India (Sebi) on Sunday issued a set of rules for banking companies to convert their distressed assets to equity capital. This means that these banks will be able to convert bad loans owed by listed companies into equity stakes in such companies.

Debt laden banks, mostly state-owned, as well as the central bank have been demanding relaxation of Sebi rules to facilitate debt-to-equity conversions by allowing corporate to allot equity stakes to banks.

Various estimates by rating agencies and research firms put the amount of loans classified by the central bank as bad or restructured vary from 10 to 13 per cent of their outstanding loans.

The new guidelines announced by Sebi allow banks to convert distressed debt into equity at a mutually agreed valuation or a "fair-pricing formula", rather than the present requirement of market-based valuation for debt-to-equity conversions.

Also, such exercises would be exempt from takeover rules to allow banks to convert debt to equity without having to make mandatory tender offers to minority shareholders.

A reduction in bad loans through conversion into equity would also help banks to improve their balance sheets.

Sebi said it would publish detailed framework of the new guidelines at a later date.

The Sebi board, which met on Sunday, also approved draft rules for municipalities and such local governments to sell bonds to fund construction of roads, bridges and hospitals.

The regulator, meanwhile, announced stricter disclosure requirements for corporate directing them to announce material information to shareholders within 24 hours after an event and make decisions by their boards public within 30 minutes.

Sebi also removed restrictions on mutual funds issuing special schemes for offshore investors.