Corporate Debt Restructuring

The Corporate Debt Restructuring mechanism was introduced in India by the Reserve Bank of India in the year 2001 to act as a measure to prevent the companies and firms from winding up. In this study, an attempt has been made to understand the various concepts related to the CDR mechanism and its impacts on our country. The meaning and the history of the mechanism have been assessed. The structure of the mechanism, which includes the CDR Standing Forum, CDR Empowered Group and the CDR Cell have been elucidated and reviewed. The impacts of the mechanism have been dissected and scrutinized. The findings of this study reveal that the CDR mechanism needs to be reviewed and reoriented.

Background

During the late 1990s, firms and companies in India were facing enormous financial distress. Financial distress refers to a position where a company becomes unable to pay its financial obligations due to inadequate income or revenue. Therefore, in the year 2001, the Corporate Debt Restructuring (CDR) mechanism was initiated by the Reserve Bank of India (RBI) as a remedial measure for preventing delinquency in the accounts of corporates facing financial difficulties due to internal and external factors[1].

 In 2002, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was also enacted by the government of India. This new law allowed financial institutions to confiscate the fixed assets of the borrowers without any meditation from the judicial system[2]. Most of the firms and financial institutions initially rely on the CDR system. However, in the event of subsequent default, borrowers are invariably subjected to the provisions of the SARFAESI Act[3].

 In 2003, to ensure better implementation and efficiency of the Corporate Debt Restructuring mechanism, the guidelines for the CDR mechanism were revised based on the recommendations of the Working group headed by Mr. Vepa Kamesam. In 2004, the guidelines were further revised based on the recommendations of a Special Group, headed by Mrs. Shyamala Gopinath.

Objectives of the mechanism

The primary objective stated for the introduction of Corporate Debt Restructuring (CDR) mechanism by the Reserve Bank of India is as follows-

  1. To ensure a timely and transparent mechanism for restructuring of Corporate Debts of viable corporate entities affected by internal or external factors, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned[4].
  2. To minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring program[5].

Meaning of Corporate Debt Restructuring

The term restructuring has not been defined under the Companies Act, 2013. In ordinary words, to restructure an organization or system means to change the way it is organized, usually in order to make it work more effectively[6].

Corporate debt restructuring is a process of reorganising a company’s debt to ensure that the company remains in business. In other words, Corporate Debt Restructuring is a non-statutory voluntary system that is based on debtor-creditor agreement, and inter-creditor agreement[7]. It aims at restructuring the liabilities of a firm or a company to ensure that a viable business, which could be profitable in the future, stays in the market.

In the words of Justice Dhananjay Y Chandrachud, “Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront a business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of changing times and to meet the demands of increasing competition[8].”

Some recognised methods of CDR include increasing the tenure of the loan, waiving off the principal repayments for a short period of time, inviting a new business partner to buy off some debt, forgoing a part of the loan, etc. Some other methods include conversions of preference shares into equity shares, conversion of overall debts into equity shares, revaluation of contingent claims, redistribution of assets and liabilities, etc[9].

Structure of the CDR mechanism

The Corporate Debt Restructuring mechanism in India is divided into a three-tiered structure. They are-

1.      CDR Standing Forum

It is the self-empowered representative general body, responsible for the formation of guidelines and policies for the institutions which are placed below the Forum in the structural hierarchy of the CDR system. The Forum provides an official platform for both the creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interests of all concerned[10].

The Forum consists of the Chairman and Managing Director of the Industrial Development Bank of India Ltd, the Chairman of State Bank of India, and the Chairman and Managing Directors of all other financial institutions which act as permanent members of the CDR system. The election procedure of the Chairman of the Forum involves electing a chairman for one year and subsequently following the principle of rotation. The Reserve Bank of India is not a core member of the forum and it is confined with the task of providing broad guidelines[11]. The Forum is also empowered to review the decisions of the CDR Empowered Group and CDR Cell.

2.      CDR Empowered Group

It is responsible for deciding individual cases of corporate debt restructuring. To ensure fair representation, the participating institutions of the CDR Empowered Group select a panel of members, which represent them in the Group. It consists of ED level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level representatives of financial institutions and banks who have an exposure to the concerned company[12]. Another function of the CDR Empowered Group is to contemplate the preliminary report submitted by the CDR Cell and check the viability and feasibility of the debts. If the preliminary report is approved, then the Group may order the restructuring of the debts of the company. The decision made by the CDR Empowered Group is terminal.

3.      CDR Cell

The CDR Cell assists the CDR Empowered Group and the CDR Standing Forum in their work. It is responsible for primarily examining the proposed restructuring of firms. It has to submit a preliminary report to the CDR Standing Group, which shall examine the feasibility and viability of the report. The preliminary report is to be made by the Cell, according to the guidelines of the CDR Standing Group, and it should be submitted before the latter within a month. If the report is approved, the Cell is required to prepare a detailed rehabilitation report.

Impact of CDR

The years 2008 to 2016 witnessed an enormous growth in the amount of debt restructured under CDR system during which the aggregate number of cases as per data available on the website of CDR cell rose from 184 (aggregate debt amounting to rupees 865 million) in 2008-09 to 530 cases (aggregate debt amounting to rupees 4030 million) in 2015-16 resulting in an increase of 188% in the number of cases and a massive 365% increase in the aggregate debt restructured[13]. However, no studies have been carried out to ascertain the impact of the system. RBI in its Financial Stability Report, 2014 highlighted the need for carrying out a net economic value impact assessment of CDR cases[14].

Due to the absence of studies which shall assess the impact of CDR, no official records ascertaining the impacts are available. However, many experts have given their opinions based on individual dissertation and research. One such expert, Mr. Rajoriya criticized that the mechanism is being misused by companies and by unscrupulous borrowers, who are taking undue advantage of the system by diverting, siphoning funds for personal benefits of directors/promoters resulting in heavy losses to public sector banks, financial institutions[15].

With an increase in the implementation of the CDR system, the degree of market power has increased and banks have suffered an unforeseeable instability. On a cumulative basis, total restructured loans under the CDR mechanism have crossed ₹ 2.29 trillion, or 4.4% of total loans given by Indian banks, as of March[16]. Ahamed and Mallick’s (2014) study reported that the mechanism was not influential beyond a certain level of market power[17]. The same researchers are of the opinion that alluded concessional loan loss provisions on restructured corporate loans have direct implications on the mark-up of the banks and their market power[18].

Conclusion

The researcher has reached the conclusion that the CDR system needs to be ameliorated. While, it has proven beneficial for certain firms and companies, which can save their businesses from drowning and increase its viability, the CDR system has resulted in an unanticipated instability for the banks participating in the mechanism. The revisions of the mechanisms have become indispensable and the re-examination of the guidelines and rules is also required.  

It was also observed that the official institutions are failing to pay attention to the deteriorating system, as no studies have been conducted to assess the impacts of the CDR mechanism. It is submitted that an official study has become the need of the hour and further delay may result in irredeemable losses.

 The researcher also came across instances of misuse of the system and hence proposes stringent and uncompromising implementation of the guidelines of the system and harsh punishments to the delinquents.

Frequently Asked Questions (FAQs)

  1. What is the meaning of Corporate Debt Restructuring?
  2. What is the structural hierarchy of the CDR mechanism in India?
  3. What is CDR Empowerment Group?
  4. What is CDR Cell?
  5. What is meant by CDR Standing Forum? What are its functions?
  6. What are the impacts of CDR mechanism in India?
  7. Why was the CDR mechanism introduced in India?

References


[1] Kaur, Deepika & Srivastava, Shashi. (2017). Corporate Debt Restructuring and firm performance: A study of Indian firms. Serbian Journal of Management. 12. 10.5937/sjm12-11916.

[2] Das, M., Patnaik, S., Pujari, V. and Krishna Kumar, T., 2015. Corporate debt restructuring and bank stability: evidence from India. Research World, XIMB, 12.

[3] Id

[4] Corporate debt restructuring, https://www.rbi.org.in/Scripts/NotificationUser.aspx (last visited Jul 3, 2020).

[5] Id

[6] Restructuring, Collins Dictionary, https://www.collinsdictionary.com/dictionary/english/restructure (last visited Jul 2, 2020).

[7] Das, S.C., 2015. The Financial System in India: Markets, Instruments, Institutions, Services, and Regulations. PHI Learning Pvt. Ltd.

[8] Ion Exchange (India) Ltd. In re, (2001) 105 Comp Cases 115 (Bom)

[9] Goode, R.M., 2011. Principles of corporate insolvency law. Sweet & Maxwell.

[10] Reserve Bank of India. (2005, November 10). Revised guidelines on corporate debt restructuring (CDR) mechanism [Circular RBI/2005-06/206, DBOD No. BP.BC.45/21.04.132/2005-06]. Retrieved from https://rbi.org.in/scripts/NotificationUser.aspx?Id=2617&Mode=0

[11] Id

[12] Supra note 10

[13] Supra 1, at 272.

[14] Financial Stability Report (Including Trend and Progress of Banking in India 2013-14) December 2014 37 (2014), https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/FSR29122014_FL.pdf (last visited Jul 2, 2020).

[15] Rajoriya, G. (2012). Corporate debt restructuring mechanism – need to review/redefine the policy. Retrieved from http://taxguru.in/corporate-law/corporatedebt-restructuring-mechanism-reviewredefine-policy.html

[16] Dinesh Unnikrishnan, Gammon India’s Corporate Debt Restructuring cleared, Livemint, (04/07/2013), http://www.livemint.com/Companies/HOIdTcBPI73tZG04H8uyGO/Gammon-Indias-corporate-debt-restructuring-cleared.html

[17] Ahamed, M. M., & Mallick, S. (2014, June). Corporate debt restructuring, bank competition, and stability: Evidence from India. Paper presented at the 6th International Finance and Banking Society (IFABS) Conference, June 18-20, Lisbon, Portugal.

[18] Id, at 10

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