Another gateway provided to the infrastructure sector

By Aiswarja Mohanty, Khaitan Sud & Partners
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The Reserve Bank of India (RBI) provided further impetus to the government’s drive to strengthen the infrastructure sector by further relaxing the norms on restructuring (for infrastructure companies) by allowing up to two years extension of the date of commencement of commercial operations (DCCO) and consequent alteration of the repayment schedules without reclassification of the account.

Aiswarja Mohanty
Aiswarja Mohanty

This move comes close on the heels of the Securities and Exchange Board of India’s relaxation of the pricing norms for conversion of outstanding debt to equity of listed companies. The relaxation aims to facilitate sale of a distressed asset and aid in revival of companies. Additionally, from a lenders’ perspective, extension of DCCO without reclassification would mean that banks avoid provisioning requirements (which would otherwise be applicable) and the stress in the account would not be reflected in their books.

Inadequacies of promoters

One of the conditions that must be satisfied to take advantage of the RBI’s relaxation is that the delay in implementing the project is due to inadequacies of the existing promoters. If the intent of the relaxation is to ensure continuing project implementation without undue and escalatory burden (such as on account of provisioning) on banks and borrower, facilitation of the sale of the distressed asset and recognition of change in management, the notification may provide a gateway for revival in cases of inadequacies of the existing promoters.

In the absence of express definition of “inadequacy”, reasons such as delay in the procurement of raw materials in the absence of a force majeure event, increasing litigation due to non-compliance with regulatory norms, inability to execute or enter into relevant project-related arrangements in a timely manner, and inability to infuse funds through equity contributions or subordinated debt to meet additional requirements of the project, might be considered depending on the factual matrix surrounding each case.

Change in ownership

It is understandable that the test of change in ownership is not the subjective “control test” and is the clearly demonstrable majority test (51% of the paid-up equity) for domestic acquisitions while providing flexibility to the extent permissible under the extant foreign direct investment norms for cross-border acquisitions.

The notification makes clear that the relaxation will not be available for intra-group transactions and the onus will be on the banks to clearly demonstrate that the acquiring entity is a new promoter or part of a new promoter group. It is understood that the aim of this is to prevent circumvention of the relaxation by demonstrating a change in ownership within the promoter group (visible only in the books) without any substantive effect or benefit at the project level.

However the possibility of infrastructure companies seeking short-term investment (in the absence of a lock-in period) with a view to avoid restructuring cannot completely be ruled out. As the test of change of ownership is majority equity shareholding, the existing promoters might transfer majority shareholding while retaining key decision-making rights thereby retaining effective control and defeating the intent of the notification. It could thus be argued that the test of transfer of ownership should also include effective control.

Conclusion

While the RBI’s move should be widely welcomed by the industry players and might go some distance in facilitating revival of stressed assets and change of ownership, the RBI should ensure that greater clarity is provided in relation to certain terms as these should not be subject to interpretation of individual banks. Whether the relaxation brings about concrete results is contingent on a number of factors but the move should be welcomed as the state policy for the infrastructure sector is clear as the principal financial regulatory body and the central government converge in their attempt to encourage, revive and facilitate investment and growth of the infrastructure sector.

However in order to ensure that the relaxation of the norms results in revival of stressed assets, it is imperative that all regulatory approvals from various authorities pursuant to change in ownership be expedited so as to enable the incoming promoter or promoter group to derive optimum benefit of the two-year window in addition to effective control being tested subsequent to transfer of ownership to ensure non-circumvention of the notification. Also, individual banks should ensure that a tentative timeline is drawn up so as to provide the incoming promoter adequate time (in the absence of a timeline for the preliminary binding agreement in connection with the transfer) to negotiate with the existing lenders on financing terms and to satisfy all procedural requirements towards cost and time overrun (including process of appraisal) in an expeditious manner.

Khaitan Sud & Partners is a fast growing law firm providing specialist legal services to both domestic and international clients. Aiswarja Mohanty is an associate at the firm.

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