1. THECORPORATETREASURER.COM38 CORPORATE TREASURER APRIL / MAY 2016
Banking
on debtTo turn corporate bad loans into performing assets, the Reserve Bank of India has nudged
its debt restructuring rules to grant lenders an easier way out of defaulting companies
Ann Shi reports
“[We] had
no problem
refinancing
our loans”
O
n February 25, the Reserve
Bank of India (RBI)
tinkered with its rules on
strategic debt restructuring
(SDR) by cutting in half the
proportion of a defaulting firm’s shares
an Indian lender must divest in the
first 18 months after converting debt to
equity.
Previously, lenders had to divest 51% of
the equity to new investors after a debt-
to-equity conversion. They now only need
to sell 26% of the shares they hold in a
defaulting borrower. The recent reduction
is intended to give lenders
a more flexible exit, with
the upside of a defaulting
company possibly turning
itself around.
“To avoid substantial
sacrifice of banks
under the SDR at the
time of divesting the
shareholding to new
promoters, as also to
keep the possible upside
option for banks, it has been decided that
an option may be with banks to divest a
minimum 26% [at the beginning] and
remaining shares in the due-course of time
as and when they find adequate value,”
Sudarshan Sen, principal chief general
manager at the Department of Banking
Regulation of the RBI, explained to The
Corporate Treasurer after announcing the
change.
BUY A DEFAULTER
The SDR regime, reinforced by the central
bank last June, granted banks the right to
convert outstanding loans into a majority
stake in a defaulting company if the
borrower failed to meet the conditions
agreed in its negotiated restructuring
package. The move was made to tackle the
sharp increase in corporate debt defaults in
the country.
After the debt-to-share conversion,
lenders can bring in a new promoter – the
majority shareholder group that manages
the day-to-day affairs of a company in
India – to help improve the management
of a stressed firm and hopefully repay the
debts. The SDR was designed to encourage
defaulters to pay back debts more quickly
by selling their assets, as
management executives
would fear being kicked
out.
RBI’s Sen expects that
new promoters who have
adequate expertise and
funds to turn around
a defaulting firm that
falls into financial
difficulties mainly due to
management inefficiency
will be able to preserve the economic value
of that firm as well as the banks’ loan
assets
OPEN INTEREST
The change will ease the pressure on
banks to find new buyers within 18
months, and, according to Sen, the rules
should incentivise current promoters to
“deleverage in the most optimum manner”.
So far, several debt-laden infrastructure
firms have begun to deleverage their
balance sheets through asset sales, said
Sumit Agarwal, Mumbai-based head of
loan syndications at IDFC Bank.
For example, Reliance Communications,
an Indian internet access and
telecommunications company, is now
taking steps to deleverage, including
the sale of its tower business Reliance
Infratel, and its non-core assets such as
the undersea cable division Global Cloud
Xchange [See box].
To date, several banks have invoked the
SDR to convert debt to equity in a number
of firms. The list includes Electrosteel
Steels, Ankit Metal and Power, Rohit
Ferro-Tech, IVRCL, Gammon India,
Monnet Ispat and Energy, VISA Steel,
Lanco Teesta Hydro Power, Jyoti
Structures and Alok Industries, according
to media reports.
IDFC Bank’s Agarwal added that
lenders had resorted to invoking the SDR
regime in several cases for bad loans
that add up to more than Rs800 billion
($11.9 billion). Hemal H. Shah, a Mumbai-
based partner in advisory services at EY,
claimed banks had taken control of more
than 15 troubled companies via the SDR.
But at the same time banks have found
it difficult to find ready equity buyers.
According to private equity website Deal
Street Asia on March 2, lenders have
initiated conversations with global private
equity funds and distressed asset funds,
but few deals have yet been closed.
It is also too early to tell whether
the SDR regime has allowed any new
promoter to help a debt-laden firm come
out of stress. “The time [allowed] for
any divestment to new promoters is 18
months,” the RBI’s Sen said, meaning no
bank that had invoked an SDR had
yet reached the time limit for divesting
its stake. 
India Focus.indd 38 4/15/16 4:15 PM

2. THECORPORATETREASURER.COM APRIL / MAY 2016 CORPORATE TREASURER 39
INDIAFOCUSINDIAFOCUS
F
aced with INR140 billion
($2.1 billion) of debt
maturing in March 2017,
Reliance Communications (RC)
is sacrificing assets to deal with
its obligations. The leveraged
Indian internet access and
telecommunications company
has publically pledged to use
all the money raised to reduce
debts.
RC is not the only company
facing debt issues in India.
Many borrowed in foreign
currencies to benefit from lower
interest rates, but a weaker
rupee has left them struggling
to pay back the debt.
Initially, RC sought to sell
non-core-assets, particularly its
sub-sea cable subsidiary Global
Cloud Xchange, but it is now
selling its towers and intra-city
optic fibre assets.
The company’s total debt was
about $7 billion as of September
2015, according to a research
report by Moody’s.
RC’s 2014-2015 annual
report said it had currency
exposure related to its revenues,
expenditure and financing.
It said that it had significant
borrowings in currencies other
than rupees and that it had to
pay for important equipment in
foreign currencies. The report
put the company’s net debt
to equity ratio at 0.98 times,
valuing assets at $14.6 billion,
stakeholder equity at $6 billion
and net debt excluding cash and
cash equivalents at $5.9 billion.
One telecommunications
equity analyst from an Indian
bank told The Corporate
Treasurer that when RC’s
saving on interest costs was
outweighed by the rupee’s
depreciation, the company tried
to refinance its foreign currency
borrowing, but it was too late
as the net debt rate had risen in
India so no lender was willing
to extend credit to the company.
Although a spokesman
declined to comment, an
official inside RC disputed this
claim. “[We] had no problem
refinancing loans from local
banks as well. Last year, a large
consortium of Indian banks
refinanced us for a loan for over
a billion [US] dollars equivalent
in Indian rupee.”
Either way, RC has no choice
but to deleverage to combat
debt. Moody’s is confident
that the company could meet
the rating targets it has set,
assuming it sells its towers.
Reporting by Mark Agnew
Reliance Communications’
move to beat down its debt
INDIAFOCUS
India Focus.indd 39 4/15/16 4:15 PM