Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring Scheme (SDR)

MP900341907Debt restructuring is a method used by companies to avoid default on existing debt by altering the terms and conditions of the existing debt or by reducing the burden of the debts on the company by decreasing the interest paid and increasing the time the company has to pay the obligation back.

CDR Mechanism

In India, Corporate Debt Restructuring System was evolved by Reserve Bank of India (RBI), and detailed guidelines were first issued in 2001 for implementation by banks. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs. 100 million and above. It is a voluntary non-statutory system based on Debtor-Creditor Agreement and Inter-Creditor Agreement and the principle of approvals by a majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. Read more about CDR here.

Reference to CDR Mechanism may be triggered by:

  • Any one or more of the creditors having minimum 20% share in either working capital or term finance, or
  • By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.

The CDR mechanism is not available to cases in which the debtor is involved in fraud or misfeasance, even in a single bank. However, CDR Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider the admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided it is granted an opportunity under CDR mechanism.

Structure of CDR System: The CDR Mechanism is a three-tier structure:

  1. CDR Standing Forum
  2. CDR Empowered Group
  3. CDR Cell

RBI guidelines on CDR, can be read here.

Strategic Debt Restructuring Scheme

Strategic Debt Restructuring Scheme  was announced by RBI on June 8, 2015 based on the  “Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum and Corrective Action Plan” dated 26 Feb 2014, wherein change of management was first envisaged as a part of the restructuring of stressed assets. With this principle in view and to ensure that the shareholders bear the first loss rather than the debt holders, RBI suggests the transfer of equity shares of the Company by promoters to lenders to compensate for their sacrifices. The scheme has been introduced with a view to revive stressed companies and provide lenders with a way to initiate a change of management in companies which fail to achieve the milestones under Corporate Debt Restructuring mechanism.

The Scheme is applicable subsequent to CDR or any other restructuring exercise undertaken by the company.

Post the conversion of debt into equity, all lenders under the Joint Lenders’ Forum must collectively hold 51% or more of the equity shares issued by the company. The share price for such conversion of debt into equity will be determined as per the method given in the Scheme. The pricing formula under Strategic Debt Restructuring Scheme has been exempted from the SEBI Regulations subject to certain conditions. The acquiring lender on account of the conversion of debt into equity under SDR will also be exempted from the obligation to make an open offer under SEBI guidelines.

Major difference between Corporate Debt Restructuring and Strategic Debt Restructuring

  Corporate Debt Restructuring Mechanism Strategic Debt Restructuring Scheme
        I.             

It covers all categories of assets in the books of creditors classified in terms of RBI’s prudential asset classification standards.

The Scheme covers assets which have been restructured by CDR or any other restructuring exercise undertaken by the companies.

 

      II.              It involves restructuring the existing debt by increasing the repayment period or by reducing the rate of interest or by granting of fresh loans

 

It provides for conversion of debt into equity by the lenders.
    III.              It has a three-tier structure which includes CDR Cell, Empowered Group and a Standing Forum. The final decision on restructuring is taken by Standing Forum.

 

The lenders form a Joint Lenders’ Forum to decide on the conversion of debt into equity as per the Scheme

Conclusion

The CDR mechanism has since inception till 30th Sept. 2015 approved 530 cases for restructuring out of which 189 cases have failed and 257 cases are at various stages of implementation. Only 87 cases have been successfully implemented. In view of the substandard performance of CDR mechanism, SDR scheme is a right step by RBI to put pressure on defaulting borrowers. However, it needs to be seen whether SDR scheme will be able to make wilful defaulters repay the loans or risk losing the ownership of their companies. In continuation of these efforts and in order to further strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties, the RBI has on 13th June 2016 issued guidelines for a Scheme for Sustainable Structuring of Stressed Assets (S4A).

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About maheshspeak

I write randomly on law, jurisprudence, polity, travel, food and anything else interesting. You can also visit my personal homepage at maheshsreenivasan.com
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