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CORPORATE DEBT RESTRUCTURINGCORPORATE DEBT RESTRUCTURING

MECHANISM ( CDR)MECHANISM ( CDR)

IndianOverseasBanGood people to grow with

OBJECTIVES OF CDR

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ABOUT CDR

The Corporate Debt Restructuring (CDR) Mechanism is a

Voluntary Non-statutory system,

based on Debtor-Creditor Agreement (DCA) and

Inter-Creditor Agreement (ICA)

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.

Members are from the Financial Institutions, Public Sector Banks and Private Sector

Banks. Non banking Finance Companies (NBFC), Asset Reconstruction Companies

( ARCs), State Level institutions, Cooperative banks can participate in specific cases

where they are involved.

The legal basis for CDR schemes is provided through signing of Debtor Creditor

Agreement (DCA) between the Corporate/ borrower and the lenders and Inter Creditor

Agreement (ICA) among the lenders.

WHO CAN MAKE REFERENCE TO CDR

Multiple banking accounts, syndication/consortium accounts, where all banks andinstitutions together have an outstanding aggregate exposure of Rs.10 crores andabove.

Covers all categories of assets, Standard and Substandard Category I and Dobtful Category II .

Cases filed in Debt Recovery Tribunals/Board for Industrial and FinancialReconstruction (BIFR)/and other suit-filed cases are eligible for restructuring underCDR subject to majority of the involved lenders agreeing for such restructuring.

Reference to CDR Mechanism may be triggered by:

Any or more of the creditors having minimum 20% share in either working capital orterm finance, or

By the concerned corporate, if supported by a bank/FI having minimum 20% share asabove.

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WHO ARE NOT ELIGIBLE:

Corporates indulging in fraud or misfeasance, even in a single bank,

are not eligible to be considered for restructuring under CDR System.

However, CDR Core Group, after reviewing the reasons for

classification of the borrower as wilful defaulter, may consider

admission of exceptional cases for restructuring after satisfying itself

that the borrower would be in a position to rectify the wilful default

provided he is granted an opportunity under CDR mechanism.

APPROACH FOLLOWED AND CONSTRAINTS

FACED BY BANKS/FINANCIAL INSTITUTION

The global financial crisis has distressed the corporate sector in a number ofcountries, affected both by a tightening of credit and weaker consumer demand. Ascountries now move from the initial crisis containment phase, a period of sustainedcorporate debt (and operational) restructuring can be expected in order to repaircorporate balance sheets and to realign the corporate sector to the post-crisiseconomy.

With the economy expected to grow by less than 5% this year, a large and growingnumber of companies are running into difficulties over interest payments. Thestandard operating procedure in such cases was to ask their bankers for a'restructuring' of their loan - to put it bluntly, they ask for easier payment termssuch as a reduction in interest rates, or longer payment periods, or even more funds.

The recent change in corporate debt restructuring (CDR) norms highlights theconflicts within the system

Among banks, between promoters and banks, Between the company and other lenders. And public sector banks bear a disproportionate share of the burden of

'restructuring'.

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AT THE BANKS EXPENSE

Such restructuring of debt as is being implemented inIndias infrastructural sector clearly favours the debtor atthe expense of the creditor.

The intent is to help the company recover. But often thatintent is not realised.

The only benefit is that in return for the losses thecreditor institution suffers, it is in a position to treat theasset (after providing for any write-down) as a standardasset subject to conditions.

But this may, in fact, provide the cover to abuse therestructuring route to bail out private investors at the

expense of the banks.

CONTD..

The problem in the power sector is that large capitalinvestments, wrong technology choices, poor management,high power costs that the State distribution agencies are notable to bear given the tariffs they charge, and difficult andcostly fuel supplies have all ensured that most of the high-profile private power projects are not viable.

The Government has sought to prop them up with concessionssuch as coal allocations without success. If this leads tofailure, the bankruptcy of the private sector power companies

can spill over onto the banks carrying their loans, much ofwhich has already been restructured. According to an estimateby Credit Suisse reported in the media, 36 private thermalpower projects carrying a debt of Rs 2,09,000 crore are nowfacing potential stress

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CONTD..

In theory, the burden of financing the losses has fallendisproportionately the comparative study as follows

Clearly, liberalisation has not reduced but rather increased the misuse

by the State of the public banking system to shore up private capital.

BANKS DURING2009-12

RESTRUCTUREDASSET %

CREDITINCREASED %

PUBLIC SECTOR BANK 47.9 19.6

PRIVATE BANKS 8.1 19.9

FOREIGN BANKS -25.5 11

IMPLEMENTATION OF CDR SCHEMES AND MONITORING

Monitoring Institution appointed by CDR EG to monitor the implementation ofpackage and submit report every month in prescribed format

Monitoring Committee constituted by CDR EG and comprises representatives of thereferring bank/institution, one or two other CDR lenders having major exposure in thecase, one lender with minor exposure and the CDR Cell.

The promoters/representatives of the company besides representatives of theconcurrent auditor, lenders engineer, if considered necessary, are invited for themeetings as special invitees.

Whenever larger issues such as relating to sharing of charge, matters relating toworking capital tie-up, permission for expansion/modernization, etc. are to bediscussed then other lenders including consortium members are invited for themeetings.

The concerned companies are required to refer all proposals for expansion,diversification, mergers/demergers, equity raising, one time settlements, partial pre-payment to CDR members/non-CDR lenders to the Monitoring Committee for duescrutiny and recommendation to Empowered Group for taking appropriate decision.

MC to meet every month till implementation of package and thereafter once in 2/3months

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PROPOSED DRAFT AMENDMENTS TO CDR MECHANISM

Vide its communication dated 25.07.2012, Ministry of Finance has given their In Principle consentto the draft amendments, which are enumerated below:

Referring institution should ensure viability of units at the time of submission of Flash Report andwherever necessary TEV study from independent reputed agencies be conducted while drafting thefinal CDR package.

Referring Institution / Monitoring Institution may also examine the possibility of change ofmanagement while drafting the final CDR package.

Wherever necessary and specially in cases of diversion of funds, forensic audit may be got carried outby the Monitoring Institution.

Promoters' contribution may be increased from the present level of 15% to 20-25% and as far aspossible entire amount should be brought in upfront/within a reasonable time.

Margin towards additional Working Capital should be in addition to the stipulated promoters'contribution.

CONTD

Pledge of 100% shareholding of promoters may be insisted in all cases (subject to theprovisions of the Banking Regulation Act).

Unconditional personal guarantee of promoters may be obtained irrespective of categoryof borrowers

Conversion of debt into preference shares is not desirable and should be the last option.Instead of preference capital, instruments such as convertible bonds having security maybe insisted upon.

Wherever conversion is necessary it should be into equity at par with a view to attainingmajority shareholding (including pledged shares) which will benefit in effecting change

of management if and when required. Conversion of debt into equity may be agreed inthe case of listed companies with a cap of such conversion say at 10% of total debt at aprice beneficial to the lender, which should be at a discount. SEBI should be approachedfor granting similar exemptions as available to BIFR / High Court schemes, so thatconversion at par is possible in CDR cases. Further, RBI should be approached to keepsuch converted equity under HTM category atleast for an initial period of 5 years.

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CONTD..

Recompense amount should be estimated at the time of approval of package and shouldform part of the same. On annual basis, actual recompense amount should be calculatedand form a part of mandatory disclosure as Contingent Liability in the audited financialsof borrower companies.

Monitoring mechanism should be strengthened and reviews undertaken regularly to re-examine the necessity of continuing the concessions granted. CDR Cell officials would nothenceforth be in the Monitoring Committees. Two lead lenders should be made as MIs tohave effective monitoring.

Wherever feasible , the lead bank should nominate a director on the board of thecompany.

TRA account should be expedited in all the CDR cases. In case TRA arrangement is notcreated / working properly by the TRA account bank, it should be mandatory to shift theTRA to next largest banker within three months of becoming aware of the same.

CONTD

Companies performing better than CDR projections should be exited after recovery ofrecompense amount. Those not exiting despite better performance be charged commercial rateof interest.

No expansion of the unit be permitted beyond the CDR package without prior permission ofCDR EG. Expansion to have better performance may be considered with the funding being

borne by the promoters.

Rate of interest for all facilities including FITL / WCTL should be minimum base rate.

Monetisation of non-core assets in time bound manner should be stipulated in all cases.

MoF has desired that recourse to CDR should only be taken where the slippages have been for

reasons which were beyond the control of the management of the company. In cases which havebeen spoilt due to the incompetence of the management of the company or where diversion /misuse of funds has taken place, change of management must be the first option.

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