GALGOTIAS UNIVERSITY

ARTICLE IN LAW ON MERGERS

TOPIC: CORPORATE DEBT RESTRUCTURING

SUBMITTED BY: RIMIKA CHAUAN

18GSOL1010021
4TH SEM LLB(HONS)
 CORPORATE DEBT RESTRUCTURING

What is Corporate Debt Restructuring1

Corporate Debt Restructuring is a voluntary process under which banks and financial
companies aid those companies, who are facing financial difficulties due to internal or
external factors, to restructure their debts. It is a non- statutory process and the motive behind
this mechanism is to provide timely support to companies and receive them and another
motive is to protect the interest of stakeholder, investors, and other parties who are acting as a
lender to such enterprises. CDR is available to those companies which have availed the credit
facility from more than one financial institution. These financial come together to help the
company for the benefit of all interest of parties

Restructuring and Insolvency

When a company is facing financial difficulties then the concept of restructuring comes into
picture and as a result of which, it is on the verge of insolvency. Restructuring a company is
done when the business operations is carried out by the company is viable, but due to some
factors, it is incurring losses. These factors can be a change in government policy, change of
interest rates, change in the value of currency, etc. these factors are obviously beyond the
control of the company and in such cases, CDR plays an important role in giving the
company another chance to survive in the market. So, the basic objectives of CDR are to
maintain the viability of the company in the long run so that interested parties do not incur
any losses. The interest parties enter into different arrangements with the company like
exchanging their debt for some number of shares (referred to as debt-equity swap), or
forgoing a part of the loan, or the interested parties agree to a fixed moratorium period where
both the parties do not institute any action against each other during the said period.

CDR is a part of the external mechanism. In the case of CDR, the company has to ensure that
it has at least some assets to support the reconstructing process because once a company

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enters into insolvency, it does not have much choice. Drawn out insolvency also compels the
company to wind up its activities, and the company loses its “separate legal entity” status.
But if proper restructuring is done, the company may get a new lease of life and continue
with its business operations.

CDR can be done in number of ways. Preference shares can be converted into equity shares;
overall debts can be converted into shares, a part of debt can be waived by the creditors,
Inter-Creditor Agreements can be modified, contingent claims can be revalued and settled,
and assets and liabilities can be redistributed. CDR includes different stages, such as making
an agreement between the parties, consideration of the proposals between the parties and
providing additional funds to the company at a higher rate of interest by the lenders so that
the company can carry on its business activities and do not become insolvent.

Corporate Debt Restructuring in the Indian Scenario2

The concept of CDR was introduced to the India in the year 2001, the RBI came up with
certain guidelines to be followed by banks and other financial institutions. The RBI stated
that the concept of CDR is a non-statutory and voluntary process where if 75% of the
creditors (by value) decide to aid the company, the other 25% of the creditors will also have
to agree to help the company through the process of CDR. CDR is available only to those
companies which have multiple bank accounts and has taken credit from multiple lenders.
Also, the outstanding amount of debt of all the creditors and lenders should be 100 million or
above in aggregate. It covers all categories of assets categorized by the RBI in terms of
prudential assets classification standards and cases which are filed with the Debt Recovery
Tribunal. A bank or a financial institution can refer for CDR if it has a 20% share in working
capital or term loan of the company. The major benefit a creditor has from restructuring debts
is that they are able to reduce the non-performing assets of a company through it.

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CDR structuring in India3

In India CDR structure has three levels:

1. CDR Standing Forum

CDRSF acts as a representative body for all the banks and the financial institutions who
participate in the process of restructuring. This forum includes financial institutions and
scheduled banks. Non-banking financial companies, co-operative banks, and regional rural
banks are not a part of the forum. The main function of the forum is to lay down policies and
guidelines which are to be followed by the Empowered Group and the CDR Cell. This form
also makes sure that the reconstructing process is implemented timely and efficiently. The
forum provides a platform to the interested parties to solve the disputes peaceably. The
CDRSF can review the decisions of the Empowered Group and the CDR Cell. Many big
banks and lending houses are permanent members of the CDRSF.

2. CRD Empowered Group

The function of the CDREG is to consider the preliminary report in all cases of restructuring,
submitted it by the CDR Cell. It is the work of the CDREG to decide whether the
reconstruction of debts is feasible and viable or not. Once the preliminary report is approved,
a reconstructing package is made up by the CRD cell in unification with the institution which
has the highest stakes in the company. The viability of the restructuring package is also
checked by the Empowered Group.

3. CDR Cell

The CDR Cell is the first authority to whom the application is made for the restructuring, and
if the CDR Cell prima facie believes that the restructuring should be done to help the
company, then it gives permission. After getting the application, the CDR Cell looks into
various aspects like corporate governance of the company, financial status of the company,
etc. based on which it sends its report to the Empowered Group. The CDR Cell should give
its opinion within thirty days of receiving the application

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 Prevailing Trends in India’s CDR mechanism4

1. In current trends, many infrastructure companies like steel and iron companies are
at the top of the CDR list. One of the reasons for this can be that due to the
slowing economy, the manufacturing sector is a bit down. Assets quality of the
scheduled banks is also going down because of many delayed projects by the
infrastructure sector.
2. A recent trend which can be seen is that public sector banks have been more
lenient that the private sector banks in sanctioning CDR packages. Taking an
example, the Indian Overseas Bank has the highest rate of restricted assets at
9.7%. The IOB is followed by the Central Bank of India at 8.39%. Compared to
these stats, restructured assets of banks like HDFC bank, ICICI Bank, and Axis
Bank is below 2%. It is important to note that the granting of CDR packages by
public-sector banks have not helped them much as the rate of non-performing
assets has not come down for them.
3. One of the major drawbacks of the current CDR Mechanism is that the promoter
director’s personal guarantee to the entire restructuring process is subject to
misuse.
4. Another disadvantage of the current mechanism relates to the liberal conversion of
debt into equity, which is often allowed by the banks. This puts them in a
disadvantaged situation. For instance, earlier the companies used to get an undue
advantage by marking up the price of their equity shares, and providing preference
shares to the banks, with limited voting rights. Also, there were no restrictions on
the amount of debt which could be converted into preference shares. After RBI
came up with guidelines regarding restructuring, the limit has been set at 10%, up
to which debt-equity swap can be made, with regards to the preference shares. For
instance, in 2010, Bheema Cement, got a restructuring package approved for itself
and rescheduled its repayment of loans, in return for shares of the company and
zero interest preference shares.
5. Small banks complain that their professional interests are not taken care because of
the nature of the guidelines that if 75% of the creditors by value approve of the
package, then it is binding on the rest of the creditors also.

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 6. Comprehending the problems. The RBI came up with some new guidelines for the
process of CDR. For example, according to the new rules, promoters of the
company are now required to bring in a greater number of equity shares, which has
to deposit in an escrow account till the time the company is back on track again.
Also, promoters have to suffer the first losses instead of the creditors and the
banks. Banks have been given new rights. For example, they can complain to the
Institute of Chartered Accountants of India if the banks feel that an auditor has
given a clean balance sheet of a company which is going through financial
problems. Banks have also been given the right to organize themselves in a Joint
Lending Forum to protect their interest. This forum will work with the debtors to
put the loan back on track and can also invite Central or State Government
officials if the Forum feels some policy changes are needed.

CASE STUDIES

1 KSL & Industries Limited

KSL Industries Limited (KSLIL), Flagship Company of Saurabh Tayal Enterprises (ex-major
stake holder of Bank of Rajasthan) is Mumbai based company engaged in Textile and Real
Estate Business. It is having spinning facility, knitting facility and processing facility in
various part of the country i.e. Nagpur and Wada. It embarked an expansion project at its
units located at Kamleshwar and Nagpur after due to appraisal in FY 2010 & FY 2011

Why KSLIL has to go for CDR?

1 During the implementation of the above -mentioned expansion project, textile industry
underwent major changes which were different from the assumption taken at the time of
project appraisal. There was major increase in the cost but commensurate increase in the
income was not reflected causing a significant gap in the profit envisaged and actual profit
earned

2 Due to industry downturn delay in receipt of receivables

3 Delay in receipt of TUFS subsidy

4 Changes industry dynamics. Past profitability not sustainable in prevailing circumstances.

2 Kingfisher Airlines
Debt Recast Package

If we look at the books of kingfisher, banks & FI’s have taken the following CDR route:

1. INR 750.10 crore of loans were converted into 7.5% compulsorily convertible
preference shares which thereafter converted into equity.
2. INR 553.10 crores of Loans were converted into 8% Cumulative Redeemable
preference shares redeemable at par after 12 yrs.
3. Repayment of the balance loans was rescheduled with a moratorium on repayment of
principal of 2 years and set-up repayment over subsequent 7 years
4. Interest for the period July 1, 2010 to March 31, 2011 on loans from the banks was
converted into a funded interest term loan repayable in 9 years including 2 years
moratorium
5. Interest rate on loans reduced by overs 300 bps
6. Additional fund based on loan facilities of INR 768.32 Crores and non -fund based
facilities of INR 444.40 CRORES sanctioned by the banks
 7. Part of the working capital limits of INR 297.40 Crores converted into working
capital term loans.

CONCLUSION
Corporate debt restructuring mechanism is a one stop forum for both lenders and borrowers
to arrive at a mutually agreeable terms to secure their interest, however varied they may be.
CDR has been in existence for more than a decide in India and this system has fulfilled its
objectives to a large extent. The need for constructing such a mechanism was arose when
economic upturn and downturn comes in the way of business cycle of individual companies.
The restructuring process is a tool for assisting distressed sections of the economy to tide
over difficulties which are temporary in nature and due to circumstances beyond its control.
With the involvement of money lenders, there is every chance that any restructuring process
would face obstacles and time delays. These are the very problem that the RBI’s informal
CDR system aims to address by setting up to framework for swift and timely action. CDR is
for larger benefit of economy and society and it must available in timely and non-
discriminate manner and this will be possibly only if we develop the necessary structures,
system and processes for restructuring. It goes without saying that its future success and
failure will depend upon the ethics and integrity of its members and the professionals
involved in the restructuring process.