BRIEF: There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for. Based on the experience in countries like the UK, Thailand etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks. INTRODUCTION: The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI’s prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.
Reference to CDR Mechanism may be triggered by:
1. Any or more of the creditors having minimum 20% share in either working capital or term finance,
2. By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.
Legal Basis of CDR Provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors.
The DCA has a legally binding ‘stand still’ agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to ‘stand still’ and commit themselves not to take recourse to any legal action during the period.
CONCLUSION – In a notification issued by RBI said that promoters of companies seeking debt recast could be allowed to bring in 50 per cent of their sacrifice upfront and the balance within a period of one year. The RBI’s decision follows representation by banks and the Indian Banks’ Association that corporates under stress are finding it difficult to bring in the promoters’ share of sacrifice and additional funds upfront, on some occasions. According to RBI rules, promoters’ sacrifice and additional should be a minimum of 15 per cent of banks’ sacrifice. However, the promoters were required to bring in the funds upfront and not over a period of time.
Author – Savan Somani, Designation: Corporate Manager Taxation, Email: email@example.com