Meaning

As the name suggests Corporate Debt Restructuring refers to the restructuring i.e.
alteration of the Corporate Debts which generally may involve the alteration of re-
payment period, amount repayable, amount of installment or the interest rate etc.

Origin
At several times corporate face financial hardships because of the factors not in
their control. For supporting these corporate with safety of the money lent to them the
need of the system like CDR arises. Based on the experience in countries like UK,
Thailand, Korea, Malaysia etc. of putting in place an institutional mechanism for
restructuring of corporate debt and need for similar mechanism in India, Corporate
Debt Restructuring System was evolved and detailed guidelines were issued by the
Reserve Bank of India on August 23, 2001 for implementation by financial institution
and banks. In 2008, comprehensive guidelines for both institutional restructuring as
well as non-institutional restructuring were issued. Master guidelines were issued in
2012, the RBI revised the CDR guidelines on May 30, 2013.

Legal Basis
The CDR Mechanism is a voluntary non-statutory system based on Debtor-Creditor
Agreement (DCA) and Inter-Creditor Agreement (ICA). The 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 to any
legal action during the period.
However, the stand still is applicable only to any civil action, either by the
borrower or any lender against the other party, and does not cover any criminal
action.
It covers all categories of assets in the books of member-creditors classified in terms
of RBIs prudential asset classification standards. 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.

Eligibility and approval criteria

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. Principal
approval by at least 75% of the creditors (by value) and 60% of creditors in number.
The CDR Mechanism covers only multiple banking accounts,
syndication/consortium accounts, where all banks and institutions together have
an outstanding aggregate exposure of Rs. 10 Crore and above.
BIFR cases are not eligible for restructuring under CDR system. However,
large value BIFR cases may be eligible for restructuring under the CDR system if
specifically recommended by the CDR Core Group.

Who may make a reference?

Any or more of the creditor who have minimum 20% share in whether working
capital or term finance or
By the concerned corporate, if supported by a bank or financial institution having
stake as above

Brief Process of CDR

Make a reference to CDR Cell with the requisite vote
CDR cell will conduct initial scrutiny by calling for flash report and place the
same before Empowered Group (EG) within 30 days to decide feasibility of
proposed CDR
The Flash Reports and Final Restructuring Proposals should be circulated ten
days before and Review/Status Notes, seven days before the meeting of the
CDR EG to the Nodal Officers of participating lenders
 EG has the 90 days to examine the viability of Flash Report which can be
extended to 180 days
Once the Flash report has been admitted super-majority vote needs to be
obtained and Final Restructuring Proposal should be submitted to CDR EG at
the earliest after clearance of Flash Report so that final package may be
approved by CDR EG within a period of 60 days from the date of admission of
the Flash Report, except for large and complicated cases, to be decided by
CDR EG, for which the time frame would be 90 days. Extension can be sought
up to maximum of 180 days which needs to be permitted by CDR core group
On admission of Flash Report/ in JLF route after determining restructuring as
CAP, the borrower should open a current account with MI to be designated as
Pre-TRA account which shall be operational within one month of approval of
scheme
CDR Cell shall issue LOA/convey the decision of CDR EG to the lenders on
approval of the minutes of CDR EG by the Chairman of the CDR EG, with a
statement that LOA/decision of CDR EG is subject to confirmation of minutes at
the ensuing CDR EG meeting and any modification taken place at the time of
confirmation minutes would be advised separately
On confirmation of minutes of CDR EG, the amendments, if any, in the
LOA/decision of CDR EG would be conveyed to the lenders and final LOA/letter
conveying decision of CDR EG would be issued to lender and company
Approved CDR EG should be implemented within 120 days from the date of
approval by CDR EG
Upon approval of TRA account should be made operational within one month
On approval of the restructuring package, Monitoring Institution (MI) should
within 10 business days circulate draft MRA, without waiting sanction letter
from individual members
Lenders should convey their observation within 3 weeks of receipt of draft MRA
MI should incorporate relevant modification and fix the date of execution
within 1 week
On the similar lines Trust and Retention Account (TRA) Bank should circulate
the draft TRA incorporating the modifications as per restructuring package and
execute the same with MRA
Individual lenders to sanction restructuring package within 45 days of LOA
Implement the plan with 45 days of sanction of the restructuring package
Within 90 days from LOA create security and execute Master Restructuring
Agreement

Few terms
Category 1 CDR System
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/sub-standard in the books of at least 90% of creditors (by value), the
same would be treated as standard/substandard, only for the purpose of judging
the account as eligible for CDR.
This is the main stream mechanism of CDR which is applicable only to Standard and
Sub-Standard accounts.

Category 2 CDR System

It is introduced for such cases where the projects found to be viable by the creditors
but the accounts could not be taken up for restructuring under the CDR system as
they fell under doubtful category.
Approval of special majority would require.
In this case the obligation of additional financing would not be there i.e. only
existing debs would be restructured and promoter would be required to bring the
additional finance.
All other norms of CDR would be applicable.
BIFR Cases
Large value BIFR cases can also be referred for restructuring under the CDR system
if specifically recommended by the CDR Core Group. As per the Core Group decision,
one of the eligibility criteria for taking up BIFR cases for restructuring under CDR
mechanism is minimum cut-off limit of Rs. 15 crore of aggregate outstanding exposure
of Banks/FIs.

Suit Filed Cases

Suit filed cases may also be eligible provided, the initiative to resolve the case
under CDR system is taken by at least 75% of the creditors (by value) and 60% of
creditors (by numbers).

Conversion of Debt into Equity

Lenders will have right to convert upto 20% of the term loan outstanding beyond
seven years into equity at any time after seven years from the date of LOA issued
by CDR Cell.
Conversion would be done as per SEBI guidelines and Loan covenants.
Conversion will not be mandatory on lenders who would also have option to take
suitable debt instruments keeping in view their internal policy guidelines and
Clause 12 of the Master Circular.
The Banks should decide on the issue regarding convertibility keeping in view
statutory requirement under section 19 of the Banking Regulation Act, 1949.

Additional Finance
Provisions relating to Additional finance and sharing thereof are covered in Clause
13 of the Master Circular.
Any additional exposure over and above the exposure on the Cut-Off-Date will be
considered as additional finance.
Additional finance if any to be provided by all creditors of a standard or sub-
standard account irrespective of whether they are working capital or term
creditors, on pro-rata basis.
Any creditor (outside the minimum 75 percent and 60 per cent) does not wish to
commit additional financing, that creditor will have an exit option.
Such exiting creditor can either (a) arrange for its share of additional finance to be
provided by a new or existing creditor, or (b) agree to the deferment of the first
years interest due to it after the CDR package becomes effective.
The first years interest without compounding, will be payable along with the last
installment of the principal due to the creditor.
The exit option will also be available to all lenders within the minimum 75 percent
and 60 per cent provided purchaser agrees to abide by restructuring package
approved by the EG.
Where the asset classification is subsequently upgraded on account of satisfactory
performance, the lead WC lender should reassess/ release the WC requirement
within a period of 3 months after up-gradation of account.
Lenders failing to sanction/disburse WC facilities will not get TRA benefits till release
of their respective share of WC limits.
If an account with any creditor is subjected to One Time Settlement (OTS) by a
borrower before its reference to the CDR mechanism, any fulfilled commitments
under such OTS may not be reversed under the restructured package. Payment
commitments of the borrower arising out of such OTS may be factored in the
restructuring package.

Recompense clause
Ordinary, ever package under CDR involves waiver and sacrifice on the part of
lenders. The Guidelines issued by RBI envisage that every restructuring package must
have right of recompense for the benefit of the lenders.
 Recompense means recouping, whether fully or partially, the sacrifice made by the
lenders as also waivers/concessions/ reliefs given by the CDR lenders to the borrower
pursuant to the approved CDR package.
Clause 18 of the Master Circular provides the elements eligible for computation of
recompense whereby lender has sacrificed such reduced interest rates, waiver of
principal/interest dues etc. This clause provides that recompense will not be applicable
in case of Withdrawal of package and One Time Settlement/ Negotiated Settlement.
This clause also provides the trigger events such as exit of the case, improved
performance, declaration of dividend etc.
Recompense shall be crystallized on occurrence of trigger event and subsequently
on recovery of the recompense either in the form of cash or debt instruments, the
company will be treated as successfully exited from CDR. However, till the company
continues under CDR, the lenders will have Right of Recompense.

Structure of CDR
The structure can be classified as follows into three tires

CDR Standing Forum

The CDR Standing Forum, the top tier of the CDR Mechanism in India, is a
representative general body of all Financial Institutions and Banks participating in CDR
system. The Forum comprises Chief Executives of All-India Financial institutions and
Scheduled Banks and excludes Regional Rural Banks, co-operative banks, and Non-
Banking Finance Companies.
It is a self-empowered body which lays down policies and guidelines to be followed by
the CDR Empowered Group and CDR Cell for debt restructuring and ensures their
smooth functioning and adherence to the prescribed time schedules for debt
restructuring. The Forum meets at least once every six months.

CDR Empowered Group

The individual cases of corporate debt restructuring are decided by the CDR
Empowered Group (EG), which is the second tier of the structure of CDR Mechanism in
India. The EG in respect of individual cases comprises
Executive Director (ED) level representatives of Industrial Development Bank of
India Ltd., ICICI Bank Ltd., State Bank of India as standing members level
representatives of financial institutions (FIs) and banks which have an exposure to the
concerned company.
The Boards of all institutions/banks authorize their Chief Executive Officers and/or
Executive Directors to decide on the restructuring package in respect of cases referred
to the CDR system, with the requisite requirements to meet the control needs While
the Standing Members of EG facilitate the conduct of the Groups meetings, voting is
in proportion to the exposure and number of the concerned lenders only.
In order to make the Empowered Group effective and broad-based and operate
efficiently and smoothly, the participating institutions and banks approve a panel of
senior officers to represent them in the CDR EG and ensure that they depute officials
only from among the panel to attend the meetings of EG.
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 companys debts is prima facie feasible
and the concerned enterprise is potentially viable in terms of the policies and
guidelines evolved by Standing Forum, the detailed restructuring package is
worked out by the referring institution in conjunction with the CDR Cell.
The EG is mandated to look into each case of debt restructuring, examine the
viability and rehabilitation potential of the company and approve the restructuring
package within a specified time frame of 90 days, or at best within 180 days of
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.

Sanction and Implementation of Approved Packages

In order to enhance the efficacy of CDR Mechanism a realistic time schedule has
been prescribed by the CDR Standing Forum.
Once the final restructuring plan is approved and confirmed by the Empowered
Group, CDR Cell issues a Letter of Approval (LOA) for the Restructuring package to all
the concerned lenders. The individual lenders are required to sanction the
restructuring package within 45 days from the date of issue of LOA and thereafter fully
implement it in the next 45 days.
The status of sanction and implementation of restructuring packages is reviewed
frequently at Empowered Group meeting. However, in order to place greater emphasis
on implementation of the approved packages, Standing Committee of Core Group
Member Banks constituted by the Core Group takes up close monitoring to ensure that
the packages are implemented expeditiously.

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 their functions. All
references for corporate debt restructuring by lenders/borrowers are made to the CDR
Cell. It is the responsibility of the lead institution/major stakeholder to the corporate to
work out a preliminary restructuring plan in consultation with other stakeholders and
submit to CDR Cell.
The CDR Cell makes initial scrutiny of the proposals received from the
lenders/borrowers, in terms of the general policies and guidelines approved by the
CDR Standing Forum, by calling for details of the proposed restructuring plan and
other information and place for consideration of the CDR EG within 30 days to decide
whether restructuring is prima facie feasible.
The EG can approve or suggest modifications to the restructuring plan, but ensure
that a final decision is taken within a total period of 90 days. The period can be
extended up to a maximum period of 180 days from the date of reference to the CDR
Cell, if there are genuine reasons.
Core Group
The CDR Core Group is carved out of the CDR Standing Forum to assist the Forum
in convening the meetings and taking decisions relating to policy, on behalf of the
Forum. The Core Group consists of Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI,
PNB, Indian Banks Association (IBA) and Deputy Chairman of IBA representing foreign
banks in India
The Core Group lays down the policies and guidelines to be followed by the CDR
Empowered Group and CDR Cell for debt restructuring. The guidelines also suitably
address operational difficulties experienced in the functioning of the CDR Empowered
Group. The CDR Core Group also decides on the modalities for enforcement of the time
frame. The Core Group also lays down guidelines to ensure that over-optimistic
projections are not assumed while preparing/approving restructuring proposals
especially with regard to capacity utilization, price of products, profit margin, demand,
availability of raw materials, input-output ratio and likely impact of
imports/international cost competitiveness.