Fear the provision allowing banks to convert pending debt into equity may dilute their stake
The debt restructuring package for microfinance institutions (MFIs) has alarmed investors of Share Microfin, a Hyderabad-based micro lender with significant exposure in the debt recast programme. These investors fear the restructuring programme would lead to sizeable dilution in their shareholding, sources said.
Share Microfin has the second highest exposure in the corporate debt restructuring (CDR) programme. The company has about Rs 2,160 crore loans which are proposed to be restructured. Share and four other microfinance companies had finalised the terms of the debt restructuring package last month. One of these was conversion of loans into shares.
If a micro lender defaults in loan repayment, banks have the option to convert the loans into shares at par. Even if there is no default, banks have the right to convert the loans into shares at a price decided by an independent valuer.
“This may lead to a substantial dilution in shareholdings of existing investors. This is a cause of concern. It needs to be addressed,” a source involved with the debt restructuring programme told Business Standard.
According to Legatum, a multi-billion dollar global fund that manages proprietary capital and is a majority shareholder in Share, banks should consider that the current crisis in the sector was caused by introduction of the Andhra Pradesh Microfinance Institutions (Regulation of Money-lending) Act and they should not penalise MFI promoters and investors.
“To our best knowledge, no micro finance institution has yet agreed to the terms offered by the creditors in the corporate debt restructuring programme and, therefore, all of these institutions remain at risk,” Mark Stoleson, chief executive officer of Legatum, said in an emailed response. “Our hope, of course, is that the banks will take a long-term view regarding the negotiations, based on the fact that this crisis has occurred through no fault of the MFIs, their leadership or their promoters, but wholly as a result of the AP Act.”
Legatum added any decision regarding acceptance of the final terms for the restructuring programme will be “the responsibility of Share’s leadership”. Share’s top management, including managing director M Udaia Kumar, was not available for comment. According to another source, Share had initiated talks with its lenders on this issue. However, Business Standard could not verify this claim.
Banks said the clause of converting loans into shares was included in the terms of the debt restructuring programme to ensure sustainability of micro lenders’ operations. “If they wish to opt out of the CDR, we always have the option of the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest (Sarfaesi) Act. Banks can always take over the company and change the management,” a senior official with a bank that has loan exposure in Share Microfin said. The said law gives lenders the power to take control of a defaulting borrowers’ assets without recourse to courts.
“We are in the business of loans and not equity. As banks, we are only interested in recovering our loans. Who will want equity in a defaulting company? The only reason we gave them that option was that even if there is a default, the company can continue to run its business and the debt-equity ratio will not fall off,” he added.
