Wednesday, August 19, 2015

Corporate Debt Restructuring & SME Debt Restructuring - Annex - 4

Annex - 4

Organisational Framework for Restructuring of Advances Under
Consortium / Multiple Banking / Syndication Arrangements

A.                 Corporate Debt Restructuring (CDR) Mechanism

The objective of CDR is to ensure timely and transparent mechanism for restructuring large corporates availing facilities from more than one bank, outside the purview of BIFR, DRT and other legal proceedings.
This mechanism will be available to all borrowers subject to the following conditions:
a)               The borrowers enjoy credit facilities from more than one bank.
b)               The total outstanding exposure is Rs.10 crore or above.

CDR system in the country will have a three tier structure :
·      CDR Standing Forum and its Core Group
·      CDR Empowered Group
·      CDR Cell

CDR Standing Forum
CDR Standing Forum would be the representative general body of all banks participating in CDR system. This will be a self empowered body, which will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.

The Forum will provide an official platform for both the creditors and borrowers to amicably and collectively evolve policies and guidelines for debt restructuring plans.

The CDR Standing Forum shall comprise of CMD, IDBI Ltd; Chairman, SBI; MD & CEO, ICICI Bank Limited; Chairman, IBA as well as CMDs of all banks and financial institutions participating as permanent members in the system. UTI, GIC, LIC may participate in the CDR system. The Forum will elect its Chairman for a period of one year and the principle of rotation will be followed in the subsequent years. However, the Forum may decide to have a Working Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing Forum. The RBI would not be a member of the CDR Standing Forum and Core Group. Its role will be confined to providing broad guidelines.

The CDR Standing Forum shall meet at least once every six months and would review and monitor the progress of CDR system. The Forum would also lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell and ensure their smooth functioning. It can also review any individual decisions of the CDR Empowered Group and CDR Cell. The CDR Standing Forum may also formulate guidelines for complicated cases that are likely to be delayed beyond the prescribed time frame.

A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing Forum in convening the meetings and taking decisions relating to policy. The Core Group will consist of Chief Executives of IDBI Ltd., SBI, ICICI Bank Ltd, BOB, BOI, PNB, IBA and Deputy Chairman of IBA representing foreign banks in India.

The CDR Core Group would lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring which shall suitably address the operational difficulties experienced in the functioning of the CDR Empowered Group. The CDR Core Group shall also prescribe the PERT chart and decide on the modalities for enforcement of the time frame. The CDR Core Group shall also lay down guidelines to ensure that over-optimistic projections are not assumed while dealing with restructuring proposals.

CDR Empowered Group
The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group, consisting of EDs of IDBI Ltd., ICICI Bank Ltd. and SBI as standing members, in addition to EDs of financial institutions and banks who have an exposure. While the standing members will facilitate the conduct of the Group's meetings, voting will be in proportion to the exposure of the creditors. Participating institutions should approve a panel of senior officers to represent them in the CDR Empowered Group and ensure deputing only the empanelled officers to attend the meetings. Further, nominees who attend the meeting pertaining to one account should invariably attend all the meetings pertaining to that account.

There should be a general authorisation by the respective Boards of the participating banks in favour of their representatives, authorizing them to take decisions on behalf of their organization.

The CDR Empowered Group will consider the preliminary report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that restructuring is feasible and viable, the detailed restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution. However, if the lead institution faces difficulties, the participating banks should decide upon the alternate bank at the first meeting of the Empowered Group when the preliminary report of the CDR Cell comes up for consideration.

The CDR Empowered Group would be mandated to approve the restructuring package within 90 days, or at best within 180 days of reference to the Empowered Group. The CDR Empowered Group shall decide on the acceptable benchmark levels on the following illustrative parameters, which may be applied on a case-by-case basis:

*                  Return on Capital Employed (ROCE),
*                  Debt Service Coverage Ratio (DSCR),
*                  Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),
*                  Extent of sacrifice.

The Board of each bank should authorise its CEO and ED to decide on the restructuring package, with the requisite requirements to meet the control needs. CDR Empowered Group will meet on two or three occasions in respect of each borrowal account. This will provide an opportunity to the members to seek authorisations, where the critical parameters are beyond the authority delegated to them.

The decisions of the CDR Empowered Group shall be final. If restructuring of debt is found to be viable and feasible and approved by the Empowered Group, the company would be put on the restructuring mode. If restructuring is not found viable, the creditors would then be free to take necessary steps for immediate recovery of dues or liquidation or winding up of the company, collectively or individually.

CDR Cell
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in their functions. The CDR Cell will make the initial scrutiny of the proposals and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible. If found feasible, the CDR Cell will prepare detailed Rehabilitation Plan with the help of creditors and, if necessary, outside experts. If not found feasible, the creditors may start recovery action.

All references for corporate debt restructuring by borrowers will be made to the CDR Cell. It shall be the responsibility of the lead institution or major stakeholder to work out a preliminary plan in consultation with other stakeholders and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan in terms of guidelines approved by the CDR Standing Forum and place it to them for consideration within 30 days. The Empowered Group can approve or suggest modifications but ensure that a final decision is taken within 90 days. However, for sufficient reasons the period can be extended up to 180 days from the date of reference to the CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell is at present housed in IDBI Ltd. However, it may be shifted if considered necessary by the Standing Forum. The costs shall be shared by all financial institutions and banks as determined by the Standing Forum.

CDR Cell will have adequate members of staff deputed from banks and financial institutions. The CDR Cell may also take outside professional help. The operating cost will be met from contributions from banks in the Core Group at the rate of Rs.50 lakh each and from other banks at the rate of Rs.5 lakh each.

Other features

       Eligibility criteria
The CDR mechanism will cover only multiple banking accounts of corporate borrowers with outstanding exposure of Rs.10 crore and above.

The Category 1 CDR system will be applicable only to accounts classified as 'standard' and 'sub-standard'. If the account has been classified as 'standard'/ 'substandard' 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, in the books of the remaining 10% of creditors. Potentially viable cases of NPAs will get priority.

Corporates indulging in frauds will be ineligible for restructuring. However the Core group may review the cases of wilful default and satisfy itself that the borrower is in a position to rectify the wilful default provided he is granted an opportunity under the CDR mechanism. Such exceptional cases may be admitted for restructuring with the approval of the Core Group only.

The accounts where recovery suits have been filed, may be eligible, provided, the initiative is taken by at least 75% of the creditors (by value) and 60% of creditors (by number).

BIFR cases are not eligible for restructuring under the CDR system. However, large value BIFR cases may be eligible if recommended by the Core Group. The lending institutions should seek the approval from BIFR before implementing the package.

      Reference to CDR system
Reference to CDR System could be triggered by (i) any or more of the creditor who have min 20% share or (ii) by the concerned corporate, if supported by a bank or financial institution having stake of min 20%.

Banks should review all eligible cases where the exposure of the financial system is more than Rs.100 crore and decide about referring the case to CDR system or to proceed under SARFAESI Act or to file a suit in DRT etc.

      Legal Basis
CDR is a voluntary system based on Debtor- Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) which shall provide the legal basis to the CDR mechanism. The debtors shall accede to the DCA, either at the time of original documentation or at the time of reference to CDR Cell. The ICA signed by the creditors will be initially valid for 3 years and subject to renewal for further 3 years. The lenders in foreign currency outside the country are not a part of CDR system. Such creditors and also creditors like GIC, LIC, UTI, etc., who have not joined the CDR system, could join CDR mechanism of a particular corporate by signing ICA, wherever they have exposure.

The ICA would be a legally binding agreement amongst the creditors. Further, the creditors shall agree that if 75% of creditors by value and 60% by number, agree to a restructuring package, the same would be binding on the remaining creditors. It is expected that such remaining creditors would be willing to participate in the CDR package, including the agreed additional financing.

A clause may be incorporated in the loan agreements whereby all creditors, including those which are not members of the CDR mechanism, agree to be bound by the terms of the restructuring package, as and when restructuring may become necessary.

One of the most important elements of DCA would be 'stand still' agreement binding for 90 days, or 180 days on both sides. Under this clause, both the parties shall agree not to take legal recourse. The clause will be applicable only to civil action and will not cover criminal action. During the stand-still period, outstanding foreign exchange derivative products can be crystallised, if the borrower is agrees. The borrower will undertake that during the stand-still period the documents will stand extended and that it will not approach any other authority for any relief. Further, the directors will not resign from the Board of Directors during the period.

      Sharing of Additional finance
Additional finance, if any, is to be provided by all the creditors, on a pro-rata basis. In case, any creditor (outside the minimum 75% and 60%) does not wish to commit additional financing, that creditor will have an option to exit.

The providers of additional finance, shall have a preferential claim, over the providers of existing finance, on the recoveries in respect of the additional exposure

      Exit Option
A creditor (outside the min 75% and 60%) who does not wish to commit additional finance will have an option to exit. As a disincentive, such creditors can either (a) arrange for its share of additional finance (b) agree to the deferment of the first year's interest due to it after the CDR package becomes effective. The first year's deferred interest without compounding, will be payable along with the last instalment of the principal due to the creditor.

The exit option will also be available to the lenders (within the min 75% and 60%) provided the purchaser agrees to abide by the restructuring package. The exiting lenders may continue with their existing level of exposure provided they tie up with the existing lenders or fresh lenders for taking up their share of additional finance.

The lenders who wish to exit would have the option to sell their share to the existing lenders or fresh lenders, at a price which would be decided between the old and new parties. The new lenders shall rank at par with the existing lenders for repayment and servicing of the dues.

In order to bring more flexibility in the exit option, One Time Settlement can also be considered. If an account is subjected to OTS by a borrower before its reference to the CDR mechanism, any fulfilled commitments under such OTS may not be reversed under the package. Rather payment commitments of the borrower arising out of such OTS may be factored into the restructuring package.

       Category 2 CDR System

CDR 2 is applicable on accounts which been classified as 'doubtful', and if a min of 75% of creditors (by value) and 60% creditors (by number) satisfy themselves of the viability and consent for such restructuring, subject to the following conditions :

(i)     It will not be binding on the creditors to take up additional financing and the decision will depend on each bank separately. It would be up to the promoter to firm up additional financing with new or existing creditors individually.

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

No individual case should be referred to RBI. CDR Core Group may take a final decision whether a particular case falls under the CDR guidelines or it does not.

All the other features of the CDR 1 system will be applicable under the Second Category too.

      Incorporation of 'right to recompense' clause
All CDR approved packages must incorporate creditors' right to accelerate repayment and borrowers' right to pre-pay. All restructuring packages must incorporate ‘Right to recompense’ clause and it should be based on certain performance criteria of the borrower. In any case, minimum 75% of the recompense amount should be recovered by the lenders and where some facility under restructuring has been extended below base rate, 100% of the recompense amount should be recovered.

B   SME Debt Restructuring Mechanism

There exists a much simpler mechanism for restructuring availed by Small and Medium Enterprises (SMEs). The operational rules of the mechanism have been left to be formulated by the banks concerned. This mechanism will be applicable to all the borrowers with outstanding up to Rs.10 crore under multiple banking arrangement. Major elements of this arrangements are as under :

(i)             Banks may formulate, a debt restructuring scheme for SMEs within the prudential norms. Banks may frame different sets of policies for different sectors within the SME if they so desire.

(ii)           While framing the scheme, banks may ensure that the scheme is simple to comprehend and will, include parameters indicated in these guidelines.

(iii)         The bank with the maximum outstanding may work out the restructuring package, along with the bank having the second largest share.

(iv)         Banks should work out the restructuring package and implement the same within a maximum period of 90 days from date of receipt of requests.

(v)           The SME Debt Restructuring Mechanism will be available to all borrowers engaged in any type of activity.

(vi)         Banks may review the progress in rehabilitation and restructuring of SMEs accounts on a quarterly basis and keep the Board informed.

Based on the Master Circular of 1/7/15.

Please visit  for any further clarification if required…………….. Poppy