Corporate Debt Restructuring, in short CDR is a scheme evolved by the Reserved Bank of India (RBI) through a circular issued on 23rd August, 2001 for implementation by banks and Financial Institutions (FIs) for realisation of amount of debt from the debtors who are not able to pay the amount in full.
It is based on a voluntary agreement between the debtor & creditor (DCA) or the creditor & creditor (ICA) whereby approval of 75% creditors i.e. Super Majority is required. It covers the multiple banking accounts and consortium or syndication of accounts where aggregate outstanding is Rs. 100 million.
That’s all about the basic framework. Now, kind of cases which are eligible for CDR are mentioned as below:-
• Debt Recovery Tribunal (DRT) Cases
• Board for Industrial & Financial Reconstruction (BIFR) Cases
• Suits filled for recovery
The further most important question is….who can Trigger CDR? and the answer is…it can be triggered by any creditor having minimum 20% share in Working Capital or term Finance or concerned corporate (if supported by bank/FIs having share as mentioned above).
The interesting fact is any application made for concealment of any fraud or misfeasance will not be allowed under this scheme but may be admitted if it is satisfied that it would rectify the default.
CDR is basically a three tier structure, as given in the pie chart below:
Let us explain all the three tiers one by one.
Firstly, CDR Standing Forum is the top most tier of the CDR Structure, it contain representative general Body of all FIs/Banks i.e. Chief Executives All Indian Financial Institution and Scheduled Banks. It is the Monitor of CDR mechanism and it is a self-empowered body which lays down the policies and guidelines which is being followed by the CDR Empowered Group (EG). It also reviews the decisions of EG & CDR Cell. CDR Core group is also carved out from Standing Forum to perform assisting functions.
Secondly, CDR Empowered Group is the second tier of the structure which decides the cases and contains Executive Directors of FIs/ Schedule. Importantly it considers the Preliminary flash report of all cases whose request is made by the CDR Cell and if it is found that CDR is potentially viable then frames the package by referring institution in conjunction with CDR Cell.
Thirdly, CDR Cell is the last tier work in conjunction with Banks/FIs for framing report etc.Potential Viability of a case varies case to case depending upon the benchmark parameters derived through various sources e.g. Internal Rate of Return, Break Even Point, Cost of Capital, etc.
Steps under the Scheme:
• Lead/major Stakeholder work out preliminary restructuring plan with other stakeholder & submit to CDR Cell.
• CDR Cell makes initial scrutiny of proposals received within 30 days that prima facie CDR is feasible.
• If found feasible then referring banks to work out detailed plan with help of other lenders in conjunction with CDR Cell (experts engage from outside, if required) & if not feasible then lenders may start action for recovery of their dues.
• EG approve or suggest modification to restructuring plan. ( final decision taken within 90 days……may extend to 180 days in genuine cases)
• The plan is monitored by MONITORING COMMITTEE (MC), It is constituted by EG at time of approval consist of representative of referring banks/FIs.
Another important part here is that, Borrowers are classified in 4 classes as given below:
Category A: Companies unable to pay due to external factors e.g. economy, industry etc.
Category B: Companies unable to pay due to external factors and also due to weak resources, inadequate vision and lack of professional support.
Category C: Borrowers are overambitious and diversified into unrelated fields with or without lenders permission.
Category D: Financially undisciplined borrowers.
Conclusion:- It is a scheme made for those who are unable to pay the sum in full where some debt is forgiven by creditor in exchange of equity position in company.
( The author is a Company Secretary in Practice & can be reached at [email protected] )