Mumbai: As banks seek to convert their distressed debt into equity in cases of corporate defaults on loans, financial regulators SEBI and RBI are in discussions to put in place a mechanism for such share purchases by lenders.
RBI has recently talked about the need for a framework for banks to convert debt into equity to recover bad loans and it wants SEBI to come up with guidelines in this regard.
SEBI and RBI will work on this matter and a proper mechanism will be put in place soon, SEBI Chairman U K Sinha told reporters on the sidelines of an event here today.
There have been a number of cases, including Kingfisher Airlines, where banks have resorted to partly converting bad loans into equity shares.
The gross non-performing assets (NPAs) of public sector banks jumped by 39 percent to Rs 2.16 lakh crore at the end of March 2014 from Rs 1.55 lakh crore in the previous fiscal.
In case of private banks, the gross NPA rose 13.76 percent to Rs 22,744 crore as compared to Rs 19,992 crore at the end of March 2013.
During 2013-14, public sector banks recovered Rs 33,486 crore against the written-off amount of Rs 34,620 crore.
Sinha said the matter is important and Sebi will soon be coming up with a discussion paper to take the interests of all the stakeholders on board.
"This is a completely new area, so we will have to discuss with society at large, we will come out with a discussion paper," he said.
"I acknowledge the need to do something but we also have to balance the needs of the entire shareholding community. This will require some time for consultation, but it is a matter in which we would like to move forward," he added.
Sinha said that there is a need for some help from the regulatory side because during conversion, banks have got a bad deal and added that during RBI has cited multiple examples of such raw deals.
"Whenever they have done conversions, the bankers have lost because the price which is determined as per Sebi formula, those prices are quite strict and those rules have been made in context of larger shareholder protection," he said, adding that there is a need for having a new formula where the interests of banks in case of defaulting companies are protected.
