The government is considering a proposal to extend the benefits under Section 81(3) of the Companies Act, to banking companies. The benefits, available only to public financial institutions, will simplify conversion of loans and debentures, subscribed to by banks in other companies, into equity.
The department of company affairs (DCA) has sought the views of ICICI Bank, the largest private sector player, on the issue. Experts said the benefit would be particularly beneficial in the case of working capital loans extended by banks.
Among other things, an extension of the benefits to banks will enable them to covert loans and debentures into equity without getting an approval from shareholders at emergency general meetings. At present, a special resolution is required.
DCA has convened a meeting of ICICI Bank executives to discuss the issue. A senior ICICI Bank executive, however, refused to comment on the matter.
Banks and other financial institutions had, in the past, resorted to conversion of debt into equity as part of restructuring loans extended to corporates. They also complain at times, boards and shareholders, particularly in the case of closely-held companies, act as roadblocks once they decide to take action against borrowers who have not paid their dues. Banks resort to conversion of debt into equity in order to realise greater gains if shares appreciate at a later date.
The extension will also necessitate an amendment to the Public Companies (Terms of Issue of Debentures and Raising Loans with option to convert such Debentures or Loans into Shares) Rules, 1977. In the case of public financial institutions, once they receive the status from DCA, the administration is left to the Securities and Exchange Board of India (Sebi). It is, however, not clear what the dispensation will be after the benefit is extended to banking companies.
Official sources said talks with ICICI Bank were preliminary in nature and a final decision would be taken after consultations with Sebi.
The development comes when the government has promulgated an Ordinance to reduce the level of non-performing assets and has empowered banks and financial institutions to deal strictly with loan defaulters.
