CDR Definition

The reorganization of a company's outstanding obligations, often achieved by

reducing the burden of the debts on the company by decreasing the rates paid and
increasing the time the company has to pay the obligation back. This allows a
company to increase its ability to meet the obligations. Also, some of the debt may
be forgiven by creditors in exchange for an equity position in the company.

Genesis of CDR Mechanism in India

There are occasions when corporates find themselves in financial difficulties
because of factors beyond their control and also due to certain internal reasons. For
the revival of such corporates as well as for the safety of the money lent by the
banks and financial institutions, timely support through restructuring of genuine
cases is called for. However, delay in agreement amongst different lending
institutions often comes in the way of such endeavors. Based on the experience in
countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an
institutional mechanism for restructuring of corporate debt and need for a similar
mechanism in India, a Corporate Debt Restructuring System was evolved and
detailed guidelines were issued by Reserve bank of India on August 23, 2001 for
implementation by financial institutions and banks.

The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory

system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement
(ICA) and the principle of approvals by super-majority of 75% creditors (by value)
which makes it binding on the remaining 25% to fall in line with the majority
decision. The CDR Mechanism covers only multiple banking accounts,
syndication/consortium accounts, where all banks and institutions together have an
outstanding aggregate exposure of Rs.200 million and above. It covers all
categories of assets in the books of member-creditors classified in terms of RBI's
prudential asset classification standards. Even cases filed in Debt Recovery
Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed
cases are eligible for restructuring under CDR. The cases of restructuring of
standard and sub-standard class of assets are covered in Category-I, while cases of
doubtful assets are covered under Category-II.

Types of Cases registered under the CDR System

Category I

The Category I CDR system is applicable to accounts, which are classified as

'standard' and 'sub-standard'. There may be a situation where a small portion of
debt by a bank might be classified as doubtful. In that situation, if the account has
been classified as ‘standard’/ ‘substandard’ in the books of at least 90% of lenders
(by value), the same would be treated as standard/ substandard, only for the
purpose of judging the account as eligible for CDR, in the books of the remaining
10% of lenders.

Category II

There have been instances where the projects have been found to be viable by the
lenders but the accounts could not be taken up for restructuring under the CDR
system as they fell under ‘doubtful’ category. Hence, second category of CDR
would be there for cases where the accounts have been classified as ‘doubtful’ in
the books of the lenders, and if a minimum of 75% of creditors (by value) and 60%
creditors (by number) satisfy themselves of the viability of the account and consent
for such restructuring, subject to the following conditions:
(i) It will not be binding on the creditors to take up additional financing
worked out under the debt restructuring package and the decision to lend or
not to lend will depend on each bank/FI separately. In other words, under the
second category of the CDR mechanism, the existing loans will only be
restructured and it would be up to the promoter to firm up additional
 financing arrangement with new or existing creditors individually.

(ii) All other norms under the CDR mechanism such as the standstill clause,
asset classification status during the pendency of restructuring under CDR,
etc., will continue to be applicable to this category also.

Membership of CDR System

CDR Mechanism can be joined by all the banks and financial institutions. It can
also be joined by Non Banking Finance Companies (NBFCs), Asset reconstruction
Companies (ARCs), State Level Institutions (SLIs) and Co-Operative Banks on
transaction-specific basis.

Legal basis of CDR

The legal
individual
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the CDR
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provided
restructuring
by the Debtor-Creditor
are decided by Agreement
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secondAlltierbanks
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/financial
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The EG in to respect
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ICA ismembers,
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in addition
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restructuring
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and banks the which
same would
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binding onto
exposure thethe
remaining
concerned
creditors.
company. The Boards of all institutions/banks
authorize their Chief Executive Officers and/or Executive Directors to decide on
Similarly, debtors are required to execute the DCA, either at the time of reference
the restructuring package in respect of cases referred to the CDR system, with the
to CDR Cell or at the time of original loan documentation (for future cases). The
requisite requirements to meet the control need
DCA has a legally binding ‘stand still’ agreement binding for 90/180 days whereby
both the debtor and creditor(s) agree to ‘stand still’ and commit themselves not to
take recourse
While the Standing
to any legal
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EG facilitate
the period.the‘Stand
conduct
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enabling the
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CDRisSystem
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necessary
and debt
number restructuring
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exercise
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lenders any outside
In order intervention,
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Empowered
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Group However,
effective andthe ‘stand
broad-based
still’ is
applicable
and operate only
efficiently
to any civil
andaction,
smoothly,
eitherthe
by the
participating
borrower orinstitutions
any lenderand against
banksthe
other party,
approve a panel
and does
of senior
not cover
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criminal
represent
action.
them in the CDR EG and ensure
that they depute officials only from among the panel to attend the meetings of
Besides, the borrower needs to undertake that during the ‘stand still’ period the
EG. The representative have general authorization by the Boards of the
documents will stand extended for the purpose of limitation and that he would not
participating FIs/banks to take decisions on behalf of their organizations
approach any other authority for any relief and the directors of the company will
regarding restructuring of debts of individual corporates.
not resign from the Board of Directors during the ‘stand still’ period.
The EG considers the preliminary Flash Report of all cases of requests of
restructuring, submitted to it by the CDR Cell. After the EG decides that
restructuring of a company’s debts is prima facie feasible and the concerned
Structure of CDR System
enterprise is potentially viable in terms of the policies and guidelines evolved by
Standing
The edifice Forum,
of thethe detailed
CDR restructuring
Mechanism package
in India standsisonworked out by of
the strength theareferring
three-tier
institution
structure: in conjunction with the CDR Cell. However, if the referring
institution/bank faces difficulties in working out the detailed restructuring
CDR Standing Forum
package, the participating institutions/banks decide upon the alternate financial
institution/bank
CDR Empoweredwhich Groupwould work out the detailed restructuring package at the
first meeting of the EG when the Flash Report comes up for discussion.
CDR Cell

CDR
The EGStanding
is mandated Forum
to look into each case of debt restructuring, examine the
viability and rehabilitation potential of the company and approve the restructuring
The CDRwithin
package Standing Forum,time
a specified the frame
top tier
of of
90 the
days,CDR
or atMechanism
best within in
180India,
days isof a
reference to the EG. The EG decides on the acceptable viability benchmark levels
on the following illustrative parameters, which are applied on a case-to-case
basis, depending on the merits of each case:
· Debt Service Coverage Ratio

· Break-even Point(Operating & Cash)

· Return on Capital Employed

· Internal Rate of Return

· Cost of Capital

· Loan Life Ratio

· Extent of Sacrifice

The EG meets on two occasions to discuss (Flash and Final Report) in respect of
each borrower account. This provides an opportunity to the participating members
to seek proper authorization from their CEO/ED, in case of need, in respect of
those cases where the critical parameters of restructuring are beyond the authority
delegated to him/her.

Having regard to the varied features of the borrower-corporates and their

promoters/sponsors, they are classified into four categories for the purpose of
stipulation of conditions. Borrower Class – A comprises companies affected by
external factors pertaining to economy and industry. Class –B borrowers are such
corporates/promoters who, besides being affected by the external factors, also
have weak resources, inadequate vision and do not have support of professional
management. Class-C borrowers are overambitious who have diversified into
related/unrelated fields with/without lenders’ permission and those classified in
Class-D are financially undisciplined borrowers. The categorization of borrowers
is decided by the EG after ensuring that all conditions being stipulated have been
discussed with the borrower concerned by the referring institution.
The decisions of the EG are final. If restructuring of debt is found to be viable
and feasible and approved by the EG, the company is put on the restructuring
mode. If restructuring is not found viable, then the creditors are free to take
necessary steps for immediate recovery of dues and/or liquidation or winding up
of the company, collectively or individually.

CDR Cell

The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to
assist the CDR Standing Forum and the CDR Empowered Group (EG) in all