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g.    Conversion of any portion of debt into shares of a borrower company.

 

Note:

RBI Guidelines for Conversion of debt into equity of borrower company: As per RBI Notification No.RBI/2013-2014/460 DNBS (PD) CC. No. 35 / SCRC / 26.03.001/ 2013-2014 dated January 23, 2014, RBI issued the following guidelines for conversion of any portion of debt into equity of a borrower company:

 

(i)            ARCs are permitted to convert a portion of debt into shares of borrower company as a measure of asset reconstruction provided that their shareholding does not exceed 26% of post converted equity of the company under reconstruction.

Note:

Exemption to ARCs from cap of 26%: As per RBI Circular No. RBI/2017-18/101

DNBR.PD(ARC)CC. No.04/26.03.001/2017-18 dated November 23, 2017, the exemption is granted to ARCs meeting the following criteria from the cap of 26%:

 

(i)             The ARC shall be in compliance with NOF requirement of Rs.100 Crore on ongoing basis.

 

(ii)           At least half of the Board of Directors of the ARC comprises of independent directors.

 

(iii)          The ARC shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion;

 

(iv)          The equity shares acquired under the scheme shall be periodically valued and marked to market. The frequency of valuation shall be at least once in a month.

 

(v)           The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which could be considered for managing the companies.

 

The above is subject to compliance with the provisions of the SARFAESI Act, 2002, Guidelines/ Instructions issued by Reserve Bank of India from time to time as applicable to ARCs as well as Foreign Exchange Management Act, 1999, Reserve Bank of India Act, 1934, Companies Act, 2013, SEBI Regulations and other relevant Statutes. The extent of shareholding post conversion of debt into equity shall be in accordance with permissible Foreign Direct Investment (FDI) limit for that specific sector.

 

(ii)          ARCs are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors holding not less than 60% of the amount outstanding to a borrower as against 75% hitherto.

 

(iii)         Every ARC shall frame a policy, duly approved by the Board of Directors, laying down the broad parameters for conversion of debt into shares of the borrower company;

 

(iv)         In cases of the Financial Assets which have turn around potential after restructuring but normally with huge default and unsustainable level of debt, it will be necessary to arrive at sustainable level of debt, on the basis of evaluation of detailed business plan with projected level of operations, which can be serviced by the company. A part of residual unsustainable debt may have to be converted to equity for an optimal debt equity structure. While SC/RCs are permitted to have significant influence or have a say in decisions surrounding the borrower company’s turnaround through conversion of debt into shares, they should not be seen to be running the companies. The shareholding of the SC/RC shall not exceed 26% of the post converted equity of the company under reconstruction.”

 

Acquiring of debt of other ARCs: ARCs are permitted to acquire debt from other ARCs subject to the following conditions:

 

a.    The acquisition is for the purpose of debt aggregation for the enforcement of security interest and as such the acquiring SC/RC’s (herein after referred as aggregating SC/RC) existing holdings at the time of acquisition are less than 60% and with the further proposed acquisition from other SC/ RCs, the total debt in the books of the aggregating SC/RC shall add up to 60% or more of the total secured debt.

 

b.    The transaction is settled on cash basis.

 

c.    The selling SC/RC will utilize the proceeds so received, for the purpose of redemption of underlying Security Receipts.

 

d.    The acquisition of debt from other ARCs shall not

Ø  Result in extension of the date of redemption of SRs issued by the aggregating SC/RC for the assets acquired from banks/FIs.

 

Ø  extend the period of realization of assets including that acquired from other SC/RCs beyond eight years from the date of acquisition of the asset by the aggregating SC/RC from the banks/FIs concerned.

 

Limitation period: The above measures can be taken by a secured creditor within the period of limitation. (Section 36)

 

Other functions (Section 10): An asset reconstruction company may do the following functions:

a.    Act as agent for any bank or financial institution for recovering their dues from the borrower.

b.    Act as a manager as mutually agreed upon between the parties.

c.    Act as receiver if appointed by any court or tribunal.

 

Application against measures to recover secured debts (Section 17):

 

Ø  Any person (including the borrower), aggrieved by any of the measures taken by the secured creditor may make an application to the Debt Recovery Tribunal (DRT) within 45 days from the dates on which such measure had been taken.

 

Ø  Such application shall be disposed of within 60 days.

 

Ø  The application shall be filed before the DRT within 45 days within the local limits of whose jurisdiction:

(i)            The cause of action, wholly or in part, arises;

(ii)          Where the secured asset is located; or

(iii)         The branch or any other office of a bank or financial institution is maintaining an account in which debt claimed is outstanding for the time being.

 

Appeal Against DRT order (Section 18):

 

Ø  Appeal against DRT order lies with the Debt Recovery Appellate Tribunal (DRAT) within 30 days from the receipt of order of DRT.

 

Ø  No appeal is to be entertained unless the borrower has deposited with the Appellate Tribunal, 50% of the amount of debt as claimed by the secured creditors or determined by the DRT, whichever is less.

 

Ø  The Appellate Tribunal may reduce the amount to 25% of the debt.

 

Compensation to the borrower for wrongful possession (Section 19)

If DRT or DRAT or the Court of District Judge on appeal holds the possession of secured assets by the secured creditor as wrongful and directs the secured creditor to return such secured assets to the concerned borrower or any other aggrieved person, who has filed the application or appeal, the borrower shall be entitled to payment of such compensation and costs as may be determined by such Tribunal or Appellate Tribunal.

RBI Guidelines relating to plan for realisation by ARCs:

 

Plan for Realisation:

Every ARC to formulate, within the planning period, formulate a plan for realisation of assets, which may provide for one or more of the following measures:

 

Ø  Rescheduling of payment of debts payable by the borrower;

 

Ø  Enforcement of security interest in accordance with the provisions of the Act;

 

Ø  Settlement of dues payable by the borrower;

 

Ø  Change in or takeover of the management, or sale or lease of the whole or part of business of borrower after formulation of necessary guidelines in this behalf by RBI.

 

Ø  conversion of any portion of debt into shares of a borrower company.

 

Policy for Realisation:

ARC shall formulate the policy for realisation of financial assets under which the period for realisation shall not exceed five years from the date of acquisition of the financial asset concerned. The Board of Directors of the ARC may increase the period for realisation of financial assets so that the total period for realisation shall not exceed eight years from the date of acquisition of financial assets concerned.

 

The Board of Directors shall specify steps that will be taken by the ARC to realise the financial asset within the timeframe or extended timeframe, as the case may be.

 

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