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Corporate Debt Restructuring In India

Introduction:

Corporate Debt restructuring helps the banks or companies facing financial problems for restructuring their debt, which may arise due to internal or external factors. The whole process remains non- voluntary with the motive to extend help and revive them while protecting the interest of stakeholders, investors, and other lenders of such parties. CDR facilitates those corporate entities which have taken loans from different financial institutions.

CDR and Insolvency:

The phenomenon of restructuring is applied during the company’s financial difficulties i.e., at the verge of insolvency. Restructuring can be considered when the company can viably carry out the operations, but it is incurring losses. It may be due to the change in government policies, interest rate, or the value of the currency, which are beyond the company’s scope. CDR provides a path to these companies to survive in the market by maintaining their financial viability in the long run, safeguarding from financial loss. There are many suffering parties which make different arrangements with other entities, including negotiation of debts for different shares, forgoing a part of the loan, or a fixed moratorium period. In the process of this external mechanism, the company must ensure that some assets which could be used for the reconstructing debt process during insolvency.

In many cases, during insolvency, the company may lose its character being a separate legal entity, an artificial person by law, but this can be avoided with proper restructuring where the business can continue by getting a new lease. This can be done by modifying the agreement, revaluation and settlement of contingent claims or waiving a part of the debt by creditors. CDR can be divided into various stages, including making the agreement between the parties, considering the proposals, and providing extra funds at a higher interest rate. 

Corporate Debt Restructuring in India:

CDR was started in India during 2001, when RBI introduced new norms that were guided by the financial institutions including banks. The Reserve Bank of India issued a statement about the non-statutory process, stating if 75% of creditors agree to revive the company, then the remaining 25% would also have to support the company in the process. The remaining balance of the loan must be higher than or aggregate to 100 million or above. A bank or any financial institution can also refer to this process of its share exceeding more than 20% of working capital. The creditors get benefit from this process as they can reduce the non performing assets of the company. 

In India, the debt restructuring comprises of 3 levels which are:

  1. CDRF Forum:

CDRF acts as a standing entity of financial institutions like scheduled banks taking part under the channel of reorganizing debts. Regional rural, co-operative, and financial companies do not fall under this category. This platform works through channelizing certain rules and regulations adhered by regulatory authorities and Corporate Debt Restructuring cells and keeping an eye on a timely and efficient reconstructing process. This is a platform provided to the parties for resolving their issues peacefully. The forum can review the decisions of the following empowered groups. There are many leading entities which are persistent associates of this forum. 

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2. The Empowered Group cell of CDR:

The first application for restructuring is to be made to the CDR cell, which permits that the restructuring takes place or not by observing various factors like financial status or corporate governance of the company. The report is further sent to the Empowered group within 30 days of receiving the application.

The following group’s function is to go through the preliminary reports of restructuring, which has been submitted by the CDR cell. CDREG further decides whether the reconstruction of debit would be feasible or not. If the report gets approval, the CDR cell proceeds with making a reconstruction package following the institution’s highest stake. They also check the viability of such packages. 

3. The Ongoing Trends & CDR mechanisms in India:

In a current scenario, the large steel and iron infrastructure enterprises exist in the CDR list. In recent days, the downfall of the economy has been a solid reason for the manufacturing sectors’ falling. The other reason for such slowing down in the asset quality of scheduled banks is delayed projects. Under a recent survey, it has been found that public sector banks are being moderate towards the private sector during the approval of CDR scheme. The most specific example of this would be relative to the overseas bank of restricted assets which consists of 9.7% under the inflated rate. The other example is, the BOI followed by 8.39%. In regard with the status of other banks, which includes the name of HDFC Bank, ICICI Bank, and Axis Bank, shows up under 2%, which means that the CDR packages had not made any difference at the rate of non-performing assets in coming down. The recent CDR mechanism’s biggest drawback is the misuse of the whole restructuring process by the promoter’s director’s guarantee. The bank’s allowance for the standard reformation of the leveraging is the other loophole, and creates chances of losses to them. Earlier, the companies seek an undue advantage of setting up equity shares prices and, on the other hand, providing the banks with limited voting rights along with the preference shares. They were also put with no restriction in considering the amount of debt that also was converted to preferred shares. Later the RBI set up some changes in the guidelines and added a ten percent limit to swap the equity debt.

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The small banks always complained that their interest had been ignored due to the conditions of regulations that mandated 75% of creditors to agree to the scheme, and the decision would be binding on the rest of the creditors. Due to these reasons, RBI set up some new guidelines in the CDR process, according to which creditors needed to bring more equity shares, which would get deposited in the escrow account till the company progressed back. In the beginning, the promoter also has to undergo losses instead of just creditors and the bank. The Banks were also provided with new rights like the power to register complaints with the ICA. The liberty of doing so can help when the bank feels that there has been a decent annual report of a company channelizing with the auditors’ monetary crisis. To safeguard their interest, the banks also had an option to organize themselves as a joint leading forum. The forum can also approach the Central or State government, if there is any need for making changes in the policies.

As per the recent reports, the CDR cell has sanctioned the loan for restructuring of Rs. 4 trillion  out of which Rs. 84,677 crores had been successfully used and Rs. 1.84 trillion was used unsuccessfully and nearly Rs. 1.32 trillion has been declared as bad loan which is presently working in the CDR cell. Therefore, RBI has decided to transfer all the pending cases to their respective banks as soon as defaults happen.

According to the RBI guidelines, it has been permitted for a scheme of one-time restructuring of the MSME loans. Meanwhile, the time period of the restructuring of the debts had to be completed by 31st March 2020. After the announcement of the budget, the government has requested RBI to extend the proposed scheme beyond 31st March 2020, and the scheme has been extended till 31st December 2020. This will help the MSMEs to overcome the challenges of deficit working capital. According to the Ministry of Finance, there are more than five lakh MSMEs who have benefited from this scheme.

NCLT Approval for CDR schemes:

The procedure to deal with the restructuring of debt is mentioned in Sections 230 and 231 of the Companies Act, 2013. It includes rehabilitating, acquiring, merging, demergering, and restructuring of debts. In case of any issue arising, the CDR scheme may suggest compromise and arrangement. It is considered when there is a disagreement between borrowers or creditors in terms of rights and liabilities. Compromise is considered at the end stage of the dispute.

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Future of CDR Schemes:

There have been rumors relating to the pre-packs insolvency process’s involvement, which means a pre-planned restructuring plan. In this plan, the company is availing to sell its assets to any bidder even before filing the insolvency petition.  The creditors as well as the shareholders consulted the NCLT with an already pre-negotiated and approved plan. This whole procedure is an excellent way of rescue from the lengthy court procedures and saves time and substantial cost of the companies already in distress. The most useful thing about it being debtor-focused and not the creditor. It aims to keep its financial and intellectual passes while making it move towards an economic slump.

Conclusion:

The CDR mechanism has positive effects on many cases, but loopholes remain as it is which could be improved. There still are minor problems like the unwillingness of foreign creditors to be a part of the CDR mechanism as they find it beneficial for Indian parties. The interest of smaller parties remains in question, and besides, many for the restructuring cases flipped into bad assets. The other major issue is the absence of sector-specific lending guidelines, resulting in an unfair priority sector for few.


REFERENCES 

  1. Roy Goode, PRINCIPLES OF CORPORATE INSOLVENCY LAW 481 (4th ed., 2011).
  2. About us, Genesis of CDR Mechanism in India, http://www.cdrindia.org/aboutus.html.
  3. Amrit Subhadarsi, Corporate Debt Restructuring- Strategies under Indian Legal Regime, LAWCTOPUS, (Feb.14,2015), https://www.lawctopus.com/academike/corporate-debt-restructuring-strategies-indian-legal-regime-2/#_edn3.
  4. RBI makes it tough for firms to get away with loan default, THE FINANCIAL EXPRESS, (Feb.27,2014,23:51PM), https://www.financialexpress.com/archive/rbi-makes-it-tough-for-firms-to-get-away-with-loan-default/1229732/
  5. Dinesh Unnikrishnan, Gammon India’s Corporate Debt Restructuring cleared, LIVEMINT, (July.4,2013,23:58PM), http://www.livemint.com/Companies/HOIdTcBPI73tZG04H8uyGO/Gammon-Indias-corporate-debt-restructuring-cleared.html.
  6. http://www.alpha-partners.org/2019/12/18/pre-packs-save-financially-distressed_17/

Cite this article (The Bluebook 20th ed.)-

Pritish Kumar Pattnaik and Snigdha Shandilya, Corporate Debt Restructuring In India, Ex Gratia Law Journal, (October 9, 2020), https://exgratialawjournal.in/blawg/company-law/corporate-debt-restructuring-in-india-by-pritish-kumar-pattnaik-and-snigdha-shandilya/.

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Author

Pritish Kumar Pattnaik
Student - KIIT School of Law, Bhubaneswar, Odisha
Snigdha Shandilya
Student - KIIT School of Law, Bhubaneswar, Odisha