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SEBI's decision on FIs

K. Hariharan, e-mail

SEBI, in its recent order dated May 11 2001 touched upon an important issue affecting all companies that had allotted shares to financial institutions, as part of conversion of loan to equity.

In most cases where companies default or delay repayment of their loan/interest obligations, FIs in accordance with the clause in the loan agreement, convert a portion of the loan into equity, thus increasing their management control. Usually, these loan agreements have an underlying condition that in the event of the loan being repaid, promoters would have a preferential right of acquiring such shares.

This is a significant decision of SEBI, as in most of the Indian corporates, FIs hold a significant percentage of the equity and hence off-loading the equity to any promoter group would attract the provisions of the SEBI take-over code.

This decision should be welcomed by investors, as it would prevent any promoter group from increasing its stake in the company by buying back the equity stake from the FIs.