Author's Note : A provision for restructuring consortium finance hated by the foreign banks, who typically assumed minority positions in consortium lending and believed that they could get pushed into accepting restructuring by the public sector banks when actually the security ought to be enforced.

Dec 03

Posted in: Gavel Speak Posted by: P S Billimoria

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Corporate Debt Restructuring

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What is the CDR Mechanism?

It is a forum of banks and financial institutions constituted with a view to ensure that corporates undergoing financial constrains due to a downturn in business cycle are given timely assistance by way of debt restricting before they turn sick.
A voluntary and non-statutory mechanism for Corporate Debt Restructuring, or CDR has been established for restructuring of corporate debt on the initiative of the Reserve Bank of India. The stated objective of the CDR framework is “to ensure a timely and transparent mechanism for restricting of the corporate debts of viable corporate entities affected by internal and external factors, outside the purview of the BIFR, DRT and other legal proceedings.”

What is the CDR System?

The CDR System comprises a Standing Forum, Core Group, Empowered Group and a Cell.
The Standing Forum is a self-empowered body, which has as members, the Chairman and Managing Director of the IDBI, the ICICI, SBI, the Indian Banks Association as well as the Executive Director of the RBI. Representatives of all participating financial institutions and banks shall also be a part of the CDR Standing Forum.
The role of the CDR Standing Forum is to function as a policy making body.
The CDR Core Group is a group of representatives of banks and financial institutions carved out of the CRD Standing Forum. It will comprise of the Chief Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National Bank & representatives of the Indian Banks Association & the RBI.
The CDR Empowered Group comprises the Executive Directors of IDBI, ICICI and SBI as standing members. In addition, the representatives of the particular banks and financial institutions who have an exposure to the concerned company shall also be part of the Empowered Group.
The CDR Empowered Group is the body which will decide on the individual cases of debt restricting.
The CDR Cell is the administrative & secretarial support body comprised of DGM and GM level functionaries of banks and institutions.

How Will It Work?

The CDR mechanism will apply only in case of syndication or consortium lending, where the outstanding exposure of banks and financial institutions is Rs.20 crores or more.
A lender or a group of lenders having at least 20% share in the financial assistance to any corporate can make a reference to the CDR Cell. The reference can also be made by the borrower with the support of a lender having such a minimum 20% exposure.

Once a reference is made, the “Standstill Provision” comes into force. According to this provision, none of the parties shall commence any legal proceedings during the period that a restructuring scheme is under consideration or preparation.

The referring bank/ institution shall prepare a preliminary restructuring scheme. The CDR Cell shall review the preliminary scheme and prepare its preliminary report which shall be put up before the CDR Empowered Group for taking a view on the prima facie feasibility of the scheme.
If the CDR Empowered Group decides that the restructuring is prima facie feasible the CDR Cell will then prepare a detailed restricting scheme which will again go back to the CDR Empowered Group for approval.

The decision of the CDR Empowered Group shall be by super-majority vote (i.e. votes cast by lenders holding at least 75% in value of the outstanding principal amounts. Such a decision would be binding on he other lenders. An appeal against the decision of the CDR Empowered Group shall lie to the CDR Core Group.
A maximum time frame of 180 days has been specified for completion of the entire process.

What is the enforcement mechanism?

This is a voluntary, non-statutory process and is therefore governed by the contractual terms and conditions contained in two agreements, the Inter-Creditor Agreement and the Debtor-Creditor Agreement.
There is a view that the provision pertaining to “Standstill Period” is not valid since Section 28(a) of the Contract Act provides that any agreement in restrain of legal proceedings is void. However, this is not a correct position since Section 28(a) contemplates only absolute restrictions on legal proceedings. A “Standstill Period” is an agreement to restrain from legal proceedings only for a limited period and is not therefore within the scope of Section 28(a) of the Contract Act.
The Inter-creditor agreement provides for liquidated damages equal to 50% of the outstanding principal amount of the particular lender in the even of non-compliance with its provisions.


Ingredients for success of the CDR Mechanism

A business which is based on sound economic fundamentals (and is therefore inherently viable), may yet undergo temporary financial distress due to extraneous factors. In such cases, timely restructuring of debt may enable the business to overcome its immediate financial difficulties. On the other hand, lack of such assistance may result in industrial sickness.

As such, the concept of debt restructuring is laudable. However, the two key elements necessary for a successful debt restructuring mechanism are:
The assistance must only be available to companies which are commercially viable in the first place. This is because:

• debt restructuring is not a measure to delay the onset of industrial sickness but the means whereby such sickness can be prevented;
• from the perspective of the commercial lenders, the restructuring must result in a situation where the quality of their assets is ultimately enhanced.
The assistance must be available in a timely manner.
The CDR mechanism recognizes both these key elements. However, there are several issues pertaining to these aspects which arise from the manner in which the CDR mechanism is proposed to be administered.
Commercial Viability?
The question of whether a business remains commercially viable or not involves the appraisal of several complex issues, including:
• Prevailing economic conditions;
• The evolution of the market for the company’s products;
• Possibility of obsolescence of technology available with the company.
The efficacy of a group of bankers sitting in committee rooms to deliberate and decide on these issues is questionable.
Time Frame?
The CDR mechanism provides for an overall time frame of 90 days within which the restructuring scheme must be approved or disapproved.
The following should be noted in this regard:
• The time period specified is only for the purpose of approval of the restructuring scheme by the CDR Empowered Group. Hence, if an appeal is filed before the CDR Core Group the time period for disposal of the appeal would not be considered as a part of the overall time limit of 180 days;
The Inter-creditor agreement provides for liquidated damages equal to 50% of the outstanding principal amount of the particular lender in the event of non-compliance with its provisions.

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