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Reserve Bank has
now decided to facilitate the resolution of large accounts in the following
manner.
Eligible Accounts
(i) The project has
commenced commercial operations;
(ii)
The
aggregate exposure of all institutional lenders is more than Rs.500 crore;
(iii)
The
debt meets the test of sustainability.
Debt Sustainability
A debt level
will be deemed sustainable if the JLF / Consortium of lenders / bank conclude
through independent techno-economic viability that it can be serviced over the
same tenor as that of the existing facilities even if the future cash flows
remain at their current level. Sustainable debt should not be less than 50% of
current funded liabilities.
Sustainable Debt
The resolution
plan may involve one of the following options with regard to the post-resolution
ownership of the borrowing entity:
(a) The current
promoter continues to hold majority of the shares or shares required to have
control;
(b) The current
promoter has been replaced with a new promoter, in one of the following ways:
(i)
Through
conversion of a part of the debt into equity under SDR mechanism which is
thereafter sold to a new promoter;
(ii)
In
the manner contemplated as per Prudential Norms on Change in Ownership of
Borrowing Entities;
(c) The lenders have
acquired majority shareholding in the entity through conversion of debt into
equity either under SDR or otherwise and
(i)
allow
the current management to continue or
(ii)
hand
over management under an operate and manage contract.
Where
malfeasance has been established, this scheme shall not be applicable if there
is no change in promoter or the management is vested in the delinquent
promoter.
In any case, the
lender shall bifurcate the current dues of the borrower into Part A and Part B
as described below;
(a)
Determine the level of debt arising within 6 months,
that can be serviced within the residual
maturities of existing debt, based on the cash flows available within 6 months.
For this purpose, cash flow from operations minus committed capital expenditure
will be considered. Where there is more than one debt facility, the maturity
profile of each facility shall be that which exists on the date of finalising
this resolution plan. For the purpose of determining the level of debt that can
be serviced, the assessed free cash flow shall be allocated to servicing each
existing debt facility in the order in which its servicing falls due. The level
of debt so determined will be referred to as Part A in these guidelines.
(b) The difference
between the aggregate current outstanding debt and Part A will be referred to
as Part B in these guidelines.
(c) The security position of lenders
will, however, not be diluted and Part A portion of loan will continue
to have at least the same amount of security cover as was available prior to
this resolution.
The Resolution Plan
The Resolution
Plan shall have the following features:
(a) There shall be
no fresh moratorium granted for servicing of Part A.
(b) There shall not
be any extension of the repayment schedule or reduction in the interest rate
for servicing of Part A.
(c) Part B shall be
converted into equity/redeemable cumulative optionally convertible preference
shares. However, in cases where the resolution plan does not involve change in
promoter, banks may, at their discretion, also convert a portion of Part B into
optionally convertible debentures. All such instruments will continue to be
referred to as Part B instruments.
Valuation
and marking to market
For
the purpose of this scheme, the fair value for Part B instruments will be
arrived at as per the following methodologies:
•
Equity
- The equity shares in the bank's portfolio should be marked to market
preferably on a daily basis, but at least on a weekly basis. Equity shares for
which current quotations are not available or where the shares are not listed,
should be valued at the lowest value arrived using the following valuation
methodologies:
o Break-up value without considering
'revaluation reserves' is to be ascertained from the company's latest audited
balance sheet. In case the latest audited balance sheet is not available the
shares are to be valued at Re.1 per company. The independent TEV will assist in
ascertaining the break-up value.
o Discounted cash flow method where the
discount factor is the actual interest rate charged to the borrower plus 3 per
cent, subject to floor of 14 per cent. Further, cash flows
within 6 months occurring within 85% of the useful economic life of the project
only shall be reckoned.
•
Redeemable
cumulative optionally convertible preference shares/optionally convertible
debentures - The valuation should be on discounted cash flow (DCF) basis. These
will be valued with a discount rate of a minimum mark up of 1.5 per cent over
the weighted average interest rate charged to the borrower. Where preference
dividends are in arrears, no credit should be taken for accrued dividends and
the value determined should be discounted further by at least 15 per cent if
arrears are for one year, 25 per cent if arrears are for two years, so on and
so forth.
Where the
resolution plan does not involve change in promoter, the principle of
proportionate loss sharing by the promoters should be met. In such cases,
lenders shall require the existing promoters to dilute their shareholdings, by conversion
of debt into equity /sale of promoter’s equity to lenders, at least in the same
proportion as that of part B to total dues. Lenders should also obtain
promoters’ personal guarantee, for at least the amount of Part A.
The upside for
the lenders will be primarily through equity/quasi equity, if the borrowing entity
turns around. The terms for conversion of preference shares/debentures to
equity shall be clearly spelt out. The existing promoter or the new promoter, may
have the right of first refusal in case the lenders decide to sell the share.
The lenders may also include covenants to cover the use of cash flows arising
beyond the projected levels having regard to quasi-equity instruments held in
Part B.
Other important
principles for this scheme are the following:
(a) The lenders
shall engage appropriate professional agencies to conduct the TEV and prepare
the resolution plan. Lenders should avoid concentration of such assignments in
any one particular professional agency.
(b) The resolution
plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50
percent by number.
(c) At individual
bank level, the bifurcation into Part A and part B shall be in the proportion
of Part A to Part B at the aggregate level.
Overseeing
Committee
a)
An
Overseeing Committee (OC) will be constituted by IBA in consultation with RBI.
The members of OC cannot be changed without the prior approval of RBI.
b)
The
resolution plan shall be submitted by the lenders to the OC.
c)
The
OC will review the processes involved in preparation of resolution plan, etc.
for reasonableness and adherence to the provisions of these guidelines, and
opine on it.
d)
The
OC will be an advisory body.
Asset
Classification and Provisioning
(A)
Where there is a change of promoter–
The
asset classification and provisioning requirement will be as per the ‘SDR’
scheme or ‘outside SDR’ scheme as applicable.
(B) Where there is
no change of promoters –
(i)
Asset
classification as on the date of lenders’ decision to resolve the account under
these guidelines (reference date) will continue for a period of 90 days. If the
resolution is not implemented within this period, the asset classification will
be as per the extant asset classification norms.
(ii)
An
account that is ‘Standard’ as on the reference date, the entire outstanding will
remain Standard subject to provisions made upfront - at least the higher
of 40 percent of the amount held in part B or 20 percent of the aggregate.
(iii)
In
respect of an account that is classified as non-performing asset on the date of
this resolution, the entire outstanding shall continue to be classified and
provided for as a non-performing asset.
(iv)
Lenders
may upgrade the account to standard category after one year of satisfactory
performance of Part A loans. In case of any pre-existing moratorium in the
account, the upgrade will be permitted one year after completion of the longest
moratorium.
(v)
Any
provisioning requirement on account of difference between the book value of
Part B instruments and their fair value shall be made within four quarters
commencing with the quarter in which the resolution plan is actually
implemented, such that the MTM provision held is not less than 25 percent of
the required provision in the first quarter, not less than 50 percent in the
second quarter and so on.
(vi)
If
the provisions held by the bank in respect of an account prior to this
resolution are more than the cumulative provisioning prescribed, the excess can
be reversed only after one year from the date of implementation of resolution plan,
subject to satisfactory performance.
(vii)
The
resolution plan and control rights should be structured in such a way so that
the promoters are not in a position to sell the company/firm without the prior
approval of lenders and without sharing the upside, if any, with the lenders
towards loss in Part B.
(viii)
If
Part A subsequently slips into NPA category, the account will be classified with
reference to the classification obtaining on the reference date and necessary
provisions should be made immediately.
(ix)
Where
a bank/NBFC/AIFI chooses to make the prescribed provisions/write downs over
more than one quarter and this results in the full provisioning/write down
remaining to be made as on the close of a financial year, banks/NBFCs/AIFIs
should debit 'other reserves' by the amount remaining un-provided at the end of
the financial year. However, bank/NBFC/AIFI should proportionately reverse the
debits to ‘other reserves’ and complete the provisioning/write down by debiting
profit and loss account, in the subsequent quarters of the next financial year.
Banks shall make suitable disclosures in Notes to Accounts as at the end of the
year.
Fees and Charges
The
IBA will collect a fee from the lenders and create a corpus fund. This fund
will be used to meet the expenses of the OC.
Mandatory Implementation
Once
the resolution plan is ratified by the OC, it will be binding on all lenders.
They will, however, have the option to exit as per the extant guidelines on
Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP).
Based on RBI circular dated 13/06/2016. For any further
clarification please refer www.rbi.org.in ……….Poppy
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