Corporate Debt Restructuring Mechanism

CDR- Definition
Corporate Debt Restructuring is basically a mechanism by way of which company endeavors to reorganize its outstanding obligations. The reorganization of the outstanding obligations can be made by any one or more of the following ways:
Increasing the tenure of the loan Reducing the rate of interest One time settlement Conversion of debt into equity Converting unserviced portion of interest into term loan

Objectives of CDR
By way of CDR there is a hope of preservation of Viable corporate that are affected by certain internal & external factors CDR aims at minimizing the losses to creditors & other stakeholders through an orderly & coordinates restructuring program

To support continuing economic recovery

CDR- Importance
When a corporate is having severe financial crisis in terms of : Trouble in repaying its debt obligation Inability in timely servicing of its interest It generally resorts to Corporate Debt Restructuring Mechanism

CDR Borrowers Point of View

When a company is having outstanding debts which cannot be serviced under its existing operations it can resort to any of the following courses of action: Enhance its quantum of Debt with an expectation to increase its Profitability & to pay off its original debt, however the company may not be able sustain such enhanced level of debt. Cease the current operations of the company & undergo winding up, so this will ultimately lead to unnatural death of company

To consider a structured plan to re negotiate the terms of its current debt with existing lenders itself This is where restructuring gains prominence.

CDR- Lenders perspective

CDR gives the lenders a unique opportunity to avoid being encumbered with NPAs. The primary interest of lenders always lies in recovering the principle amount lent to corporate along with returns on that investment & not in liquidation of assets Apart from this Liquidation proceedings are notorious for yielding low returns for creditors

Therefore, CDR becomes an instrument for the lenders, i.e. the banks, - to aid the transformation of otherwise Non-Performing Assets into productive assets.

CDR Is it legitimate in every case?

Whether a case should be referred for restructuring or not? It is based upon thorough examination of facts & viability of the case. However, wherever the demand for restructuring is legitimate, and there is a good reason to believe that the corporation may be revived, it must be considered for restructuring.

CDR Structure
The CDR structure in India is based upon the three tier structure as follows:

CDR Standing Forum

CDR Empowered Group CDR Cell

CDR Cell
This cell makes the initial scrutiny of the proposals.
If restructuring gets approved this cell makes a detailed plan for restructuring in conjunction with the lenders

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. This group is comprised of the ED level representatives of leading banks along with ED level representatives of concerned lenders This group based upon preliminary report prepared by CDR cell decides whether they should take up the restructuring or not, if yes then they provide initial guidelines When final restructuring plan is prepared by CDR cell the same is again approved by EG within a specified time frame of 90 days, or at best within 180 days.

Borrowers classification:
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.

Class-D are financially undisciplined borrowers.

Standing Forum
This is the top tier in CDR mechanism comprised of representatives of all the financial institutions & banks excludes Regional Rural Banks, co-operative banks, and Non-Banking Finance Companies. 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. This body lays down the policies & guidelines to be followed by the EG & CDR cell for debt restructuring. The Forum meets at least once every six months.

Legal Basis to CDR

The legal basis to the CDR System is provided by : Inter-Creditor Agreement (ICA) and the Debtor-Creditor Agreement (DCA). ICA: All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions, if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors. DCA: Debtors are required to execute the DCA. 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.

Certain Instances of CDR

In the past, there have been several companies which have been referred to CDR, few of them are as follows: Subhiksha Retail Vishal Retail GTL Infra Air India Wockhardt India cements Jindal Steel Essar Steel HPL

Accounts classification under CDR system

RBI Guidelines for restructured Account

The dues to the bank are fully secured by tangible security (not applicable in the infrastructure projects, provided the cash flows generated from these projects are adequate & escrow mechanism available). The unit becomes viable in 10 years, if it is engaged in infrastructure activities and in 7 years in the case of other units. The repayment period of the restructured advance including moratorium period doesnt not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. Promoters sacrifice and additional funds brought by them should be minimum of 15% of the banks sacrifice. Personal Guarantee is offered by the promoter except when the unit is affected by the external factors pertaining to the economy and industry, The restructuring under consideration is not a repeated restructuring

Exit & Recompense Clause

The payment of recompense amount gets triggered in the following circumstances: Mandatory Cases: Exit: The exit of the borrower from the CDR mechanism either voluntarily or at the end of the restructuring period. Performance: If the performance of the borrower in any whole financial year improves in comparison to CDR projections. Declaration of dividend: If the borrower declares dividend in any financial year in excess of ten percent on annualized basis. The recompense amount shall be payable prior to distribution of dividend.

Exit & Recompense Clause

Methodology: On the occurrence of any of the trigger events, the referring/monitoring institution shall convene a meeting of the Monitoring Committee to determine the quantum of the recompense amount payable by the borrower till the trigger date.