Relaxations given to banks by Sebi for conversion of debt in distressed companies into equity is unlikely to help lenders to solve bad loans problem, India Ratings said today.
Markets regulator Sebi had last week relaxed norms for banks to convert their debt into equity in distressed listed companies to help lenders to deal with defaulters.
"The conversion of debt into equity is unlikely to benefit lenders or corporate borrowers as most of the current set of large corporate borrowers are already in distress or are close to it," the rating agency said in a report.
Sebi had said under the updated norms pricing would be based on "fair value" with some safeguards and conversion into equity can only happen when the lenders have acquired at least 51 per cent stake in the concerned company.
According to India Ratings, among the 500 largest corporate borrowers, 59 have already entered into corporate debt restructuring (CDR).
It believes that within the 500 corporates, 120 corporates accounting for Rs 3,65,100 crore of debt have weak credit metrics and a significant number among them will become non-performing assets (NPA) or enter into CDR, while some will go for bilateral restructuring.
It said most of these 120 corporates were acknowledged or unacknowledged distress for over two to four years.
If the debt is reduced by 30 per cent of their equity value based on their current market capitalisation, the leverage number will not reduce meaningfully for three out of four corporates, it said.
"This implies that the interest servicing ability will also not improve in any meaningful way. Thus, the problem of impending NPA remains unaddressed for corporates which account for around 65 per cent of the distressed debt," the report said.
