Corporate Debt Restructuring

In India

MEANING• Corporate Debt Restructuring is basically a mechanism by way of which company endeavors to reorganize its

outstanding obligations.

• Corporate Debt Restructuring (CDR) is an effective financial tool for minimizing the adverse effects of default and financial difficulties on the borrowers as well as lenders.

• Accounting literature does provide some indicators on financial difficulties, including: • The borrower has defaulted on debt obligations. • The borrower has declared or is in the process of declaring bankruptcy.• If the borrower cannot obtain funds from another source at market rates available to non-troubled

debtors. • The borrower’s cash flow is insufficient to service existing debt based upon actual or projected

performance.

OBJECTIVE

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure:

• Timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.

• The framework will aim at preserving viable corporates that are affected by certain internal and external factors

• To minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.

• To support continuing economic recovery.

WAYS TO RESTRUCTURE DEBT

• The reorganization of the outstanding obligations can be made by any one or more of the following ways:

• Increasing the tenure of the loan • Reducing the rate of interest • Changes in Moratorium period • One time settlement • Conversion of debt into equity • Converting unserviced portion of interest into term loan

WHEN CAN IT BE TRIGGERED

• Reference to Corporate Debt Restructuring System could be triggered by:

• Any or more of the creditor who have minimum 20% share in either working capital or term finance. • By the concerned corporate, if supported by a bank or financial institution having substantial stake. • 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.

STRUCTURE OF CDR SYSTEMCDR system in the country have a three tier structure:

CDR CELL

• The CDR Cell is the third tier of the CDR Mechanism in India.

• All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell.

• Compares the proposal with the general policies and guidelines approved by the CDR Standing Forum.

• CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers.

• Carries out a basic viability and feasibility study of the proposals.

• Mandated to assist the CDR Standing Forum and the CDR Empowered Group (EG).

EMPOWERED GROUP (EG)• Second tier of the structure of CDR Mechanism in India.• The individual cases of corporate debt restructuring are decided by the CDR Empowered Group (EG).• Comprises Executive Director level representatives IDBI ltd., ICICI Bank ltd, the SBI as standing members with

ED level representatives of financial institutions (FIs) and banks which have an exposure to the concerned company.

• Carries out detailed analysis of the proposal forwarded by CDR Cell.• Responsible for conducting voting for a viable debt restructure.• Associates itself with the debt restructuring referring institution.• The EG decides on the acceptable viability benchmark levels on the following illustrative parameters:

• Debt Service Coverage Ratio• Break-even Point(Operating & Cash) • Return on Capital Employed • Internal Rate of Return • Cost of Capital • Loan Life Ratio • Extent of Sacrifice

CORE GROUP• The CDR Core Group is carved out of the CDR Standing Forum.• Assists the Forum in convening the meetings and taking decisions relating to policy, on behalf of the Forum.• Consists of Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI, PNB, Indian Banks Association (IBA) and Deputy Chairman

of IBA representing foreign banks in India.• The Core Group lays down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt

restructuring.• The Core Group also lays down guidelines to ensure that over-optimistic projections are not assumed while

preparing/approving restructuring proposals especially with regard to• Capacity utilization• Price of products• Profit margin• Demand• Availability of raw materials• Input-output ratio • Likely impact of imports/international cost competitiveness.

CDR STANDING FORUM

• Top tier of the CDR Mechanism in India

• Comprises Chief Executives of All-India Financial institutions and Scheduled Banks.

• Self-empowered body which lays down policies and guidelines.

• Ensures their smooth functioning and adherence to the prescribed time schedules for debt restructuring.

• Provides an official platform for both creditors and borrowers to collectively evolve policies and guidelines for working out debt restructuring plans.

• Monitors the progress of the CDR Mechanism.

• Reviews individual decisions of the CDR Empowered Group and CDR Cell.

MECHANISM

CREDITORS CDR CELL SUBMITS PROPOSAL INITIAL SCRUTINYCALL FOR PROPOSED RESTRUCTURED PLAN

DECIDES WHETHER RESTRUCTURING IS

PRIMA FACIE FEASIBLE OR NOT WITHIN 30

DAYS

IF FEASIBLE, REFERRING INSTITUTION /BANK TAKES

UP WORK OF PREPARING DETAILED RESTRUCTURING

PLAN WITH CDR CELL

PASS IT ON TO THE EG

EG COMPARES WITH GUIDELINES AND

POLICIES LAID BY CDR STANDING FORUM

EG CARRIES OUT DETAILED STUDY AND ANALYSIS OF

VIABILITY

IF SATISFIED, APPROVES AND CONFIRMS THE

RESTRUCTURING PLAN OR CAN SUGGEST

MODIFICATIONS

TAKES FINAL DECISION WITHIN 90 DAYS

CDR CELL ISSUES A LETTER OF APPROVAL TO ALL CONCERNED

LENDERS

CONCERNED LENDERS ARE REQUIRED TO GIVE APPROVAL WITHIN 45

DAYS

FULLY IMPLEMENT IT IN NEXT 45

DAYS

POINTS TO NOTE

• The scheme will not apply to accounts involving only one financial institution or one bank.

• Minimum amount of debt should be 10 Crores.

• While corporates indulging in frauds and malfeasance even in a single bank will continue to remain ineligible for restructuring under CDR mechanism as hitherto, the Core group may review the reasons for classification of the borrower as willful defaulter.

EXIT & RECOMPENSATE CLAUSE• The payment of recompense amount gets triggered in the following circumstances:

• Mandatory Cases:• Exit: The exit of the borrower from the CDR mechanism either voluntarily or at the end of the

restructuring period.• Performance: If the performance of the borrower in any whole financial year improves in comparison to

CDR projections.• Declaration of dividend: If the borrower declares dividend in any financial year in excess of ten percent

on annualized basis. The recompense amount shall be payable prior to distribution of dividend.

• Methodology:• On the occurrence of any of the trigger events, the referring/monitoring institution shall convene a

meeting of the Monitoring Committee to determine the quantum of the recompense amount payable by the borrower till the trigger date.

ADVANTAGES

A Case on Restructuring of DFL

• Dhandapani Finance Limited was a Non Banking Financial Company registered with RBI

• Incorporated on October 30 1986, as a Private Limited Company and became a Public Limited Company on May 04 1988

• It was registered under Category A- Hire Purchase And Leasing Company

• Became a Pvt. Ltd., Company in the year 1980 and later in Jan 1995 it went in for a Public issue and became a widely held Public Co.

• Primarily engaged in the business of financing of tractors, construction equipment's, commercial vehicles and other passenger carrying multi utility vehicles, cars, etc

• Main focus was to finance used asset at a gross yields in the range of 24% to 26%

• The company operates through a network of 48 branches located in semi urban and rural markets of Andhra Pradesh, Tamil Nadu, Kerala, Karnataka and Maharashtra.

Source: cdrindia.org/formats.htm

Corporate Debt Restructuring

• The two most important things that the bank considers before referring the case to the CDR Mechanism are

1. Reasons for the inability of loan

2. Future Outlook of the Company

• DFL’s financial position deteriorated due to some unavoidable external reasons as listed below

1. Adverse effects of reviewing accounting policies

2. Failure to raise funds through right issue

3. Effect of failure of company’s effort for a slump sale of COMAPNY

4. Global recession and its effect on company’s business

Source: cdrindia.org/formats.htm

Restructuring the Company

The following points are considered for restructuring the company

1. Future outlook for the company

2. Marketing viability

3. Demand and supply analysis

4. Future market demand and supply

Source: cdrindia.org/formats.htm

The Cash Flow StatementParticulars 2009-10 2010-11 2011-12 2012-13 2013-14

Interest Rate 15.0% 15.0% 15.0% 15.0% 15.0%

Interest Rate -IRR 27.5% 27.5% 27.5% 27.5% 27.5%

Interest Rate (Flat):commission 8.0% 8.0% 8.0% 8.0% 8.0%

Upfront processing charges 2% 2% 2% 2% 2%

New customers per month 20 150 155 155 155

Ticket Size -1 (Loan Size)in lakhs 3 3 3 3 3

Ticket Size -2 5 5 5 5 5

Ticket Size -3 8 8 8 8 8

%age customers in Ticket Size - 1 70% 50% 50% 50% 50%

%age of customers in Ticket Size - 2 20% 15% 15% 20% 20%

%age of customers in Ticket Size - 3 10% 35% 35% 30% 30%

No. of Months 36 36 36 36 36

No. of Collection in a month (per customer) 1 1 1 1 1

No. of Months 31 31 31 31 31

Cash collateral as a % age of disbursements 10% 10% 10% 10% 10%

Interest on cash Collateral 12% 12% 12% 12% 12%

No of customers defaulting 8% 8% 8% 8% 8%

Period in which defaulters making payment (Months) 3 3 3 3 3

Defaulting customers turning into NPA 10% 10% 10% 10% 10%

NPA Provisioning (as a percentage of NPA Assets) 50% 50% 50% 50% 50%

Period of NPA becoming Loss assets(Months) 12 12 12 12 12

Provision on loss Assets 100% 100% 100% 100% 100%

Loss assets( as a percentage of total NPA Asset) 8% 8% 8% 8% 8%

Repossessed assets(as a percentage of total NPA Asset) 60% 60% 60% 60% 60%

Source: cdrindia.org/pdf/CDR-Master-Circular-2008.pdf

The Restructuring Plan !!

Name of the Bank

O/S

WORKING

CAPITAL

SANCTIONED

WORKING

CAPITAL

% share (% of

sanctioned lt) DP allocation

Available DP

(secured

W.cap) Irregular Portion WCTL OCCRPS

Ing Vysya Bank Ltd 785.85 800.00 6.15% 407.83 407.83 378.02 113.41 264.61

YES Bank 1,428.29 1500.00 11.54% 764.69 764.69 663.60 199.08 464.52

Bank of India 1,470.55 1500.00 11.54% 764.69 764.69 705.86 211.76 494.10

The Federal Bank Ltd 1,261.43 1300.00 10.00% 662.73 662.73 598.70 179.61 419.09

Canara Bank 1,214.90 1200.00 9.23% 611.75 611.75 603.15 180.95 422.21

State Bank of travancore 962.32 1000.00 7.69% 509.79 509.79 452.53 135.76 316.77

Punjab National Bank 930.08 1000.00 7.69% 509.79 509.79 420.29 126.09 294.20

UCO Bank 937.78 950.00 7.31% 484.30 484.30 453.48 136.04 317.44

Indian Overseas Bank 828.84 900.00 6.92% 458.81 458.81 370.03 111.01 259.02

The Dhanalakashmi Bank Ltd 493.41 500.00 3.85% 254.90 254.90 238.51 71.55 166.96

State Bank of Hyderabad 469.37 500.00 3.85% 254.90 254.90 214.47 64.34 150.13

Bank of Baroda - 0.00 0.00% - - - - -

HSBC 942.10 1000.00 7.69% 509.79 509.79 432.31 129.69 302.62

The Catholic Syrian Bank Ltd 812.58 850.00 6.54% 433.32 433.32 379.26 113.78 265.48

TOTAL 12,537.50 13,000.00 100.00% 6,627.28 6,627.28 5,910.22 1,773.07 4,137.16

Source: cdrindia.org/pdf/CDR-Master-Circular-2008.pdf

Conclusion

The following have been our learning from the above project:

• Whenever there is an economic crisis, the rehabilitation of the financial sector is a first order priority

– Macroeconomic stability is critical.

• We have also learned the working of CDR Mechanism Cell in India

• We have also learned the International Norms of CDR followed in various countries.

• The process of CDR followed by a bank and the important factors that have to be considered before initiating for the restructuring.

– Determining of projected financial statements based on key assumptions.

– The various guidelines that are mandatory for CDR.

– Analysis of viability ratios and the financial statements.

Group -

Rajveersinh Chauhan (20151036)

Riddhima Kartik (20151037)

Rishabh Surana (20151038)

Ronak Sani (20151039)

Shobhit Garg (20151040)