Lenders’ forum and change in ownership issues clarified

The “Framework for Revitalising Distressed Assets in the Economy”, issued by the Reserve Bank of India (RBI) on 30 January 2014, requires banks and non-banking financial companies (NBFCs) to identify stress in their loan accounts and classify them into special mention accounts (SMA) in accordance with the framework. The framework mandates lenders to form a joint lenders’ forum (JLF) once the account is reported as SMA-2 to the Central Repository of Information on Large Credits and if the aggregate exposure of the lenders in the account is at least ₹1 billion (US$15 million). The JLF is to arrive at a joint corrective action plan (CAP) for early resolution and recovery.

On the basis of the framework, the RBI issued circulars dated 26 February and 21 March 2014 to banks and NBFCs respectively. On 8 June 2015, the RBI issued a circular introducing the concept of a “strategic debt restructuring” (SDR) scheme, which could be undertaken by banks to convert loan dues to equity shares so as to ensure that promoters have a greater stake in reviving stressed accounts.

The framework and the SDR scheme were analysed in this column in the September 2014 and June 2015 issues of India Business Law Journal respectively. The RBI has by way of a circular dated 24 September 2015 (JLF circular) reviewed the framework to iron out the issues being faced by lenders. By way of another circular of the same date (circular on change in ownership), the RBI has provided clarifications in relation to change in ownership by lenders outside the SDR scheme.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.