IMAGE Issue 8
NEWS LETTER
February 2003
February, 2003
TOPIC : CORPORATE DEBT RESTRUC URING (CCDDRR)) R R T B S RUCTU I G TO I
1. What is the genesis of CDR? The corporate financial requirements of Indian industry have been largely met by both commerc ial banks and financial institutions (FIs). Due to various factors, external or internal, some of the business units go into financial difficulty. Timely support for revival of these units through restructuring in viable cases is called for, but the delay in agreement amongst different lending institutions is a deterring factor in this effort. Hence, a need was felt to set up an institutional mechanism for restructuring of corporate debts and this is the genesis of CDR system introduced by RBI in India in August, 2001. 2. What is CDR system? CDR system is a non-statutory voluntary mechanism set up by banks and FIs under the advice of RBI, to provide timely support to viable entities facing problems. The system has legal binding through Debtor-Creditor Agreement (DCA) and Inter Creditor Agreement (ICA). A revised scheme of CDR notified by RBI in February, 2003 is followed by all banks and FIs now. . 3. What are the objectives of CDR? (a) To support continuing economic recovery by enabling viable units to continue business operations as a going concern. (b) To ensure financial return to the lenders greater than that which would be achieved by liquidation of the borrower. (c) To provide a timely and transparent mechanism so as to ensure that all lenders are treated reasonably and fairly having regard to their respective priorities and rankings and to be outside the purview of BIFR, DRT and other legal proceedings. Hence, the focus is on incipient sickness and circumventing the same through an orderly and co-ordinated restructuring program. 4. What categories of accounts are covered under CDR? (a) Accounts covered by multiple banking / syndication / consortium. (b) Accounts with outstanding exposure of Rs. 20 crores & above by
banks and FIs. (c) The outstanding exposure may be fund-based and non-fund based facilities. (d) Provision of two categories of debt restructuring viz. Category 1: Accounts classified as Standard & Sub-standard and Category 2: Accounts classified as Doubtful. (e) Suit-filed accounts and large value BIFR accounts subject to certain eligibility conditions. However, CDR mechanism does not apply to accounts involving only one financial institution or one bank and also to cases of wilful defaulters. 5. What are the eligibility criteria?
R Category I: If an account is classified as
Standard/Sub-standard in the books of atleast 90% of lenders (by value), the same would be treated as Standard / Sub-standard, only for judging the account to be eligible for CDR under this category in the books of remaining 10% of lenders. If 75% of lenders (by value) agree for CDR package, the remaining lenders have to fall in line. R Category II: Doubtful accounts will become eligible if minimum of 75% lenders (by value) agree for CDR without any binding on the lenders for any additional finance. The existing loans will only be restructured and it will be the responsibility of the promoters to arrange additional assistance with new / existing lenders. R For suit-filed accounts, a minimum of 75% of the lenders (by value) should take initiative for restructuring. R Large value BIFR cases if specifically recommended by CDR Core Group on case-tocase basis, subject to approval from BIFR before implementing the package. 6. What are the structural tiers of CDR system and their functions? The CDR system will have a three-tier structure viz.: A) CDR Standing Forum: Self-empowered body consisting of CMD of IDBI, Chairmen of SBI, ICICI Bank, IBA and CMDs of all participating banks / FIs and Executive Director, RBI.
Functions: Will lay down policies & guidelines and monitor the progress of CDR; ensure adherence to the prescribed time schedule for debt restructuring; can review any individual decision of the CDR Empowered Group and CDR Cell. CDR Core Group carved out of Standing Forum : Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI, PNB, IBA, representative from RBI, and Deputy Chairman of IBA representing foreign banks in India. Functions: Will lay down policies & guidelines for debt restructuring, to be followed by Empowered Group and CDR Cell; prescribe PERT chart for processing of cases referred to CDR and decide on modalities for enforcement of timeframe; lay down guidelines with regard to capacity utilisation, price of products, profit margin, demand, availability of raw materials, input-output ratio and like impact of imports / international cost competitiveness to avoid over-optimistic projections. B) CDR Empowered Group: ED level representatives of IDBI, ICICI Bank & SBI as Standing Members and ED level representatives of banks / FIs who have exposure to the concerned company. Functions: Will decide the individual cases of corporate debt restructuring; examine the acceptable viability benchmark levels based on the following illustrative parameters: Return On Capital Employed (ROCE), Debt Service Coverage Ratio (DSCR), Gap between the Internal Rate of return (IRR) and the Cost of Fund (CoF) and Extent of sacrifice The decisions of this Group shall be final on the viability / feasibility study for CDR of a company. C) CDR Cell: A permanent administrative set up. secretarial and
8. What is the timeframe and mechanism for restructur ing? (a) The lead institution / major stakeholder will submit a preliminary restructuring plan, in consultation with other stakeholders, to the CDR Cell within one month. from referring the case for CDR. (b) CDR Cell will prepare the restructuring plan as per policy guidelines and submit before Empowered Group within 30 days. (c) The Empowered Group will consider the cases submitted to it by CDR Cell in two stages - first a preliminary report and then a final report - within a total period of 90 days. However, for sufficient reasons, the period can be extended upto a maximum of 180 days from the date of reference to CDR Cell. Decisions are taken by super majority vote (by a minimum of 75% of lenders) which will bind all parties involved. 9. What is the impact on asset classification?
During pendency of case with the CDR system, the usual asset classification norms would continue to apply and will not be stopped because of reference to CDR Cell. If restructuring under CDR system takes place, then the asset classification status should be restored to the position which existed at the time of reference to CDR Cell. In other words, any additional provision made during the intervening period on account of deterioration in asset classification may be reversed once restructuring is implemented. 10. What are the other features of CDR?
Functions: Will help CDR Standing Forum and CDR Empowered Group in all their functions; conduct initial scrutiny of proposals and put up before CDR Empowered Group; prepare detailed Rehabilitation Plan with the help of lenders. 7. Who can make reference to CDR system? (a) All references for corporate debt restructuring by lenders or borrowers will be made to the CDR Cell. (b) Any or more of the creditors with minimum 20% share in either working capital or term finance. (c) The concerned corporate, if supported by a bank or financial institution having stake as stated in the previous point.
Exit option is available for lenders either from extending additional finance or from the package itself subject to certain conditions. R Standstill clause binds debtor & creditors to commit themselves not to resort to any other legal action (civil) during the standstill period (90 180 days) during which documents shall stand extended for the purpose of limitation. R Disclosure by banks / FIs in their balance sheets under Notes on Accounts to include the following information pertaining to CDR undertaken during that year: (a) The total amount of loan assets subjected to restructuring under CDR, (b) The amount of standard assets subjected to CDR, (c) The amount of sub-standard assets subjected to CDR. (d) The amount of doubtful assets subjected to CDR. Prepared by: Ms. K. Malathy, Chief Manager/Faculty Membe, IMAGE, Chennai
