Investors Acquiring Distressed Cos May be Spared Open Offer

Sebi considering lenders' proposal; if approved, it could revive sick cos, resolve banks' stressed asset situation

The rules of acquisition will be tweaked to make it more attractive for investors to acquire distressed companies whose bankers are pushing for a change in management.
Sebi, the Indian capital markets regulator, is considering a proposal to spare such investors from making open offers to the minority shareholders of companies where they take control.

The interests of a defaulting, cash strapped company, it's felt, would be better served if a new promoter spends its resources to infuse capital in reviving the company than paying out to shareholders in an open offer (that is triggered by the takeover code).

“The request (from lenders) is under consideration. We are working on it. It is expected to happen soon.An open offer is not warranted as money is needed by the company,“ a Sebi official told ET.

Banks have had very little success in converting outstanding loans to defaulting companies into equity and selling the shares to more credible investors who chip in fresh capital. The extent of haircut on loans, the background of new promoters and apprehensions of bankers fearing they could be blamed for failing to strike a fair deal have stood in the way of change in the control of distressed companies.

An incentive such as exemption from open offer may not itself be a game changer, but together with the bankruptcy code it could make a difference in handing over fund-starved companies to stronger investors and resolving the stress in banks.

Legal professionals like Kaushik Mukherjee, Partner at BMR Legal, believe that an exemption to open of fer is justified as the new promoter acquiring shares from the lenders would only provide public shareholders exit at a throw away price at which the sick unit is acquired. “It may be more profitable for public shareholders to continue till after a revival to be able to unlock value. An ailing SpiceJet used a different open offer exemp tion route sometime back in relation to its change of control. There, the exemption from open offer was in relation to reconstruction schemes approved by competent authorities,“ said Mukherjee.

Under the present rules, banks which convert loan into equity in taking control of a truant borrower, are not required to make open offer, but investors buying the equity from banks have no such exemption.

Also, companies under BIFR, security enforcement law, Court's arrangement receive automatic exemption from making any open offer. According to Manish Makharia, Partner, Brescon Corporate Advisors, while it is fair to give an exit option to minority shareholders when there is a change in management, one should examine the same in a stress situation from a different perspective as it facilitates a new capable management to regenerate value for everyone.

The market regulator has been cautious in granting such exemption in the past as was evident in the acquisition of Satyam Computer Services where no relief was given to the buyer Tech Mahindra.

But, perhaps, the surge in sticky loans on books of banks and hurdles faced by lenders are driving regulatory authorities to explore more practical solutions. “If distressed companies are not allowed such exemption, banks will not extend funds unless the promoters bring in matching contribution towards equity. If Sebi insists on open offer in such cases, it does not help in the revival as money goes to shareholders and not to the company,“ said RS Loona, managing partner of Alliance Corporate Lawyers and a former Sebi member.

ET VIEW

Welcome Initiative

A waiver of the open offer rule is a good idea. This will make it easier and quicker for an investor to acquire the promoter's shares, and save the hassle of an open offer that is aimed at providing an exit to existing shareholders. It will cut down the time and costs involved in process involved. But given the high level of debt on the books of banks, which reflect distress that cry out for re-organisation or dissolution, the need is also to swiftly enforce the bankruptcy code for the resolution of corporate distress.

The Economic Times New Delhi,19th September 2016

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said. Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm

Credit card spending growth declines on RBI gaze, stress build-up

Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem. “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and

CA Online

Search This Blog