The promoters of three steel companies -- Essar Steel, Jindal Vijayanagar Steel and Ispat Industries -- will be required to write down the equity in these companies by 40 per cent.
This is one of the many riders that the banks and financial institutions have put as a precondition to clearing the debt restructuring of the three beleaguered firms.
The corporate debt restructuring group, led by the Industrial Development Bank of India, met on Thursday and informally gave its nod to the proposal. The package will formally be cleared on January 20.
According to sources in the lending community, even though the banks and institutions are taking a hair cut,' the promoters of the three companies will have to fulful stringent conditions.
After writing down the equity by 40 per cent, part of the debt will be converted into equity.
This conversion will be done in such a way that the promoters' and the lenders' equity exposure to all three companies is pegged at the same level.
Jindal Vijayanagar Steel has an equity base of Rs 1,352 crore (Rs 13.52 billion), Ispat Industries Rs 685.76 crore (Rs 6.857 billion) and Essar Steel Rs 330.35 crore (Rs 3.303 billion).
"If the promoters wish, they can convert 40 per cent of the equity to 0.001 per cent preference shares that can be redeemed after 20 years. This is as good as writing down the equity," said a source.
The promoters will be required to pledge shares in dematerialised form to the lenders to the extent that the lenders hold at least 60 per cent of the equity of the three companies.
The lenders have also asked for personal as well as corporate guarantees of the promoters as a precondition to the debt restructuring.
The package will include a reduction in the interest rate on term loans to 14 per cent from the present 17-18 per cent and conversion of 40 per cent of the loans into foreign currency loans carrying an 8 per cent interest rate.
Even though the lenders are waiving penal interest and charging simple interest on the loans outstanding of the three companies, the compound interest portion will be converted into 7-10 year zero-coupon bonds.
Besides, trusts and retention accounts will be set up to ensure smooth implementation of the debt recast.
The lenders have also a provision for accelerated repayment. In other words, whenever the cash flow of the companies improves, they will be asked to clear their dues by paying bigger installments.
The move by the lenders follows a decision taken at a meeting on restructuring the liabilities of the three firms convened by finance secretary S Narayan on January 2.
The meeting was attended by the chiefs of ICICI Bank, IDBI, State Bank of India and IFCI, with the finance ministry convincing the lenders to restructure the debt.