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Asset recast cos may find it easier to convert bad loans into equity
March, 27th 2007

The business of buying non-performing assets from banks and turning them around is likely to become hassle-free for asset reconstruction companies (ARCs). The government is planning to remove the legal hurdles these companies face while trying to convert bad loans into equity.

The company affairs ministry has sought comments from all stakeholders on three proposals it is working on in consultation with the finance ministry. One of the proposals is to specify RBI-approved ARCs under a company law provision relating to further issue of capital.

Section 81(3) says the borrower company is exempted from the requirement of passing a special resolution in a general meeting or securing governments approval for share allotment if a lender wants to subscribe to the capital as part of an option attached to the loan.

Since ARCs acquire bad loans under the Sarfaesi Act, they cannot meet the requirement of the special resolution or government approval. The proposed amendment would remove this technical hurdle.

The other proposal is to exempt ARCs from Sebis takeover regulations. Currently, any conversion of debt into equity in excess of the stipulated threshold cannot be done without making an open offer to acquire the shares.

This applies to acquiring 15% of the voting rights or consolidation beyond 5% where the acquirer already has 55-75% stake.

Another proposal is to exempt ARCs from the Sebi disclosure and investor protection guidelines which deal with the pricing of the equity shares to be issued to the ARC as part of a resolution scheme.

Although ARCs are incorporated as companies, they mostly come under the jurisdiction of the ministry of finance.

While bankers say the net NPAs of banks is just 2% of their portfolio, some experts dispute the figure, saying it could be much higher. Easing the restrictions on ARCs to convert loans into equity is expected to make the non-performing loan market more dynamic.

Besides Asset Reconstruction Company of India (Arcil), banks such as Standard Chartered and Kotak are also getting into acquisition of NPAs. Some banks and FIs have also secured licences to invest in ARCs under RBI guidelines.

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