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Banks reluctant to convert RCom debt to equity under RBI’s SDR norms

LiveMint logoLiveMint 03-10-2017 Gopika Gopakumar

Mumbai: Lenders to Reliance Communications Ltd (RCom) are reluctant to convert their debt into equity if the company doesn’t provide strong visibility on how it plans to reduce debt before December, three bankers aware of the matter said.

RCom’s big creditors plan to meet later this week to discuss what to do next after the company controlled by Anil Ambani called off the planned merger of its wireless business with Aircel Ltd, citing regulatory delays and opposition from operational creditors.

RCom share prices fell to a record low of Rs17.10 on Tuesday. Graphic: Mint

The proposed merger and a separate deal to sell RCom’s telecom tower assets was the cornerstone of the telecom firm’s plan to pare its Rs45,000 crore debt, amid pressure on earnings because of aggressive tariffs offered by Reliance Jio Infocomm Ltd, controlled by Anil Ambani’s elder brother Mukesh.

“The calling off of RCom-Aircel merger will put focus back on (banks’) telecom exposure. Apart from the top five players in the telecom sector, there is a possibility that banks have to make higher provisioning for other players. Currently banks have provided for only 1% of the overall exposure,” said Alpesh Mehta, deputy head of research, Motilal Oswal Securities Ltd.

In June, a consortium of lenders led by State Bank of India invoked strategic debt restructuring (SDR) in the case of RCom, allowing them to convert debt into equity. Banks allowed RCom a breather on debt servicing till December, pending the completion of the two transactions. During this so-called standstill period, there was to be no conversion of debt to equity under SDR.

RCom continues to be in “a standstill period” till December 2018 and expects to complete the restructuring process as per the rules, the company said in a 1 October statement. Shareholders have approved the issue of equity shares to lenders by converting loans.

Under SDR, banks have the ability to convert part of their debt in a stressed firm to 51% equity, allowing them to take operational control and sell it to a suitable buyer.

“The debt of the company is 11 times its market capitalization. Unless the company is able to deliver on its monetization plan, it doesn’t make sense to convert debt into equity,” said one of the bankers cited earlier. “Taking the company to bankruptcy court is the last option as banks will have to make higher provision.”

Under the Reserve Bank of India’s norms, banks have to set aside at least 50% of their exposure as provisions for bankruptcy cases taken to the National Company Law Tribunal (NCLT).

At Tuesday’s closing price, RCom’s market capitalization stood at Rs4,256 crore. Its debt at the end of June was close to Rs45,000 crore. RCom shares closed at a fresh low of Rs17.10 on BSE, down 10.94% from their previous close, on a day that the benchmark Sensex rose 0.68% to close at 31,497.38 points.

“We will be discussing SDR resolution plan with the banks next week,” an RCom official said on condition of anonymity.

Mint had reported on 3 October that the company was preparing to monetize assets ranging from spectrum to real estate to bring down debt close to Rs25,000 crore, or more than half, much before December 2018. Mint had also reported that the valuation of its deal to sell 51% stake in tower business to Canada-based Brookfield Infrastructure Group may be lower than earlier anticipated due to lack of additional Aircel tenancies.

The merger had been facing headwinds from various operational creditors as well as regulatory authorities. In September, the Indian unit of Sweden’s Ericsson AB filed insolvency petitions against RCom and two of its subsidiaries before NCLT in Mumbai to recover dues worth Rs1,154 crore. The hearing for admission of the petition has been adjourned till 6 October.

Amrit Raj in New Delhi contributed to this story.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

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