Textile companies can expect a Rs 1,000 crore (Rs 10 billion) largesse a year in addition to waiver from liquidation damages and penal interest if the finance ministry accepts the recommendations of the NK Singh steering committee that submitted its report to Finance Minister Jaswant Singh on Monday.

Once the restructuring scheme gets the finance minister's nod, the interest paid by textile units will be halved to 8 per cent from 15-16 per cent now.

While banks and financial institutions will have to take a 4 per cent hit in interest earnings by cutting the interest rate by one-fourth to 12 per cent, they will be compensated from the proposed Rs 500-crore (Rs 5-billion) Textiles Reconstruction Fund for the balance 4 per cent.

The report has, however, said companies availing of the restructuring scheme will have to pledge their entire shareholding with voting rights with the lead financial institution or bank, if considered necessary.

The lead bank or FI may also seek personal guarantee of promoters for additional assistance and will retain the right to convert the loan into equity at par if the company defaults. For future borrowings, the companies will have to take prior approval of the banks or FIs.

The report has recommended that the interest rate on working capital be brought down to the prime lending rate, which is about 11-11.5 per cent now. The companies will also be spared from liquidation damage and penal interest.

Further, the textile units will repay the restructured loans with 8 per cent interest over 10 years, including a two-year moratorium.

Overdue interest will be converted into zero-coupon debentures to be repaid after the restructured loans are liquidated. No interest incentive would be extended to the units after 10 years.

Indo Rama Synthetics managing director OP Lohia said an effective interest rate of 8-9 per cent is in line with the expectations of the industry.

"The important thing is how it will be implemented. As far as pledging of shares and write-down of equity is concerned, the industry recognises that some contribution has to come from the promoters also," he said.

Vardhman group chairman SP Oswal said a large number of units in the textile sector have become unviable with the high cost of their debt. The industry, in an earlier meeting, had asked for a 7 per cent interest rate.

"They will have to lose some interest, which is anyway not recoverable. In fact, the institutions run the danger of losing the principal also," he said.

The scheme would be open for two years from the date of announcement. Officials said the government may fix April 1, 2003 as the effective date for operationalising the scheme.

While loans covered under the Technology Upgradation Fund would not be eligible under the scheme, all existing secured loans and excess drawing of working capital would be covered.

Companies, which have taken significant foreign currency loans, the report has suggested that the interest rate be cut down to Libor plus 2 per cent.

External commercial borrowings too may be covered under the loan provided the lead FI or bank undertakes the loan responsibility on behalf of the original ECB lender.

Sacrifice up to 3 per cent of interest under the foreign currency loan would be made good to the FIs and banks from the reconstruction fund.

The committee has suggested that financially sound companies be given an option of repayment over 10 years of loans taken after the announcement of the scheme.

However, the companies should commit to plough back additional surplus cash for modernisation. Exporting companies should be allowed to swap their current rupee loans with cheaper forex loans, which will help them reduce their cost of funds to about 5 per cent.

The reconstruction fund, the report said, would be administered by IDBI or ICICI. A high-powered committee under the joint chairmanship of the textiles secretary and the banking secretary would monitor the implementation of the schemes.

The committee, which will also have 3-4 outside experts, will submit quarterly reports to the finance minister.

• Interest rate to be halved to 8% a year, Centre to fund 4% gap
• Loan to be repaid over 10 years including a 2-year moratorium
• Companies may be asked to pledge entire stake with the lead bank or FI
• Liquidation damages, penal interest to be waived
• Textile reconstruction fund to have an initial corpus Rs 500 crore.