Online Course in Insolvency Laws Covers Sick Companies Recovery

Three Months Certificate Course (Online) in
Insolvency and Bankruptcy Laws and Procedure
Module 1: Introduction to Insolvency and Bankruptcy Regime in India
Unit-4: Sick Companies and Recovery of Debt1
An Act to make, in the public interest, special provisions with a view to

securing the timely detection of sick and potentially sick companies
owning industrial undertakings, the speedy determination by a Board of
experts of the preventive, ameliorative, remedial and other measures
which need to be taken with respect to such companies and the expeditious
enforcement of the measures so determined and for matters connected
therewith or incidental thereto.
Preamble of SICA 19852
Government finally repeals SICA 13 years after repeal Act was passed.
In an event that took more than a decade to fructify, the Ministry of
Finance vide a notification dated 25th November 2016, has repealed the
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) with
effect from 1st December 20163.
The legislative framework for revival and rehabilitation of sick companies

has evolved over time. First, the Sick Industrial Companies (Special
Provisions) Act, 1985, was promulgated, followed by the Companies
(Second Amendment) Act, 2002, which incorporated the provisions for
revival of sick industrial companies in Companies Act, 1956. Thereafter, the
Sick Industrial Companies (Special Provisions) Repeal Act, 2003, was
enacted; and finally the Companies Act, 2013, was passed. The provisions
relating to sick companies have undergone significant changes during each
transition4.
In the wake of sickness in the country’s industrial climate prevailing in the

eighties, the Government of India set up in 1981, a Committee of Experts
under the Chairmanship of Shri T. Tiwari to examine the matter and
1
Module compiled by Dr. Vijay Kumar Singh, Associate Professor & Head, School of Corporate Law,
IICA
2
The Sick Industrial Companies (Special Provisions) Act, 1985 Act No. 1 of 1986 [8th January, 1986.]
3
Ministry of Finance, Notification No. S.O. 3568(E), dated November 25, 2016, available
at http://www.egazette.nic.in/WriteReadData/2016/172799.pdf. The repeal Act was passed on 1st
January, 2004 to give way to the provisions under Companies Act though could not be notified ever.
4
A. Ramaiya, Guide to the Companies Act: Providing guidance to the Companies Act, 2013, Volume 3,
2015, p. 4365
Copyright @ School of Corporate Law, IICA Page 1 of 26

recommend suitable remedies therefore. Based on the recommendations of

the Committee, the Government of India enacted a special legislation
namely, the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986) commonly known as the SICA5.
The main objective of SICA is to determine sickness and expedite the

revival of potentially viable units or closure of unviable units (unit here in
refers to a Sick Industrial Company). It was expected that by revival, idle
investments in sick units will become productive and by closure, the locked
up investments in unviable units would get released for productive use
elsewhere.
The Board of experts named the Board for Industrial and Financial
Reconstruction (BIFR) was set up in January, 1987 and functional with
effect from 15th May 1987. The Appellate Authority for Industrial and
Financial Reconstruction (AAIRFR) was constituted in April 1987.
Government companies were brought under the purview of SICA in 1991
when extensive changes were made in the Act including, inter-alia, changes
in the criteria for determining industrial sickness.
SICA applied to companies both in public and private sectors owning

industrial undertakings:-
 pertaining to industries specified in the First Schedule to the
Industries (Development and Regulation) Act, 1951, (IDR Act) except
the industries relating to ships and other vessels drawn by power
and;
 not being "small scale industrial undertakings or ancillary industrial
undertakings" as defined in Section 3(j) of the IDR Act.
 The criteria to determine sickness in an industrial company were
5
http://www.bifr.nic.in/introduction.htm
Industrial sickness had started right from the pre-Independence days. Government had earlier tried to
counter the sickness with some ad-hoc measures. Nationalisation of Banks and certain other measures
provided some temporary relief. RBI monitored the industrial sickness. A study group, came to be known
as Tandon Committee was appointed by RBI in 1975. In 1976, H.N. Ray committee was appointed. In
1981, Tiwari Committee was appointed to suggest a comprehensive special legislation designed to deal
with the problem of sickness laying down its basic objectives and parameters, remedies necessary for
revival of sick Units. The committee submitted its report to the Govt. in September 1983 and suggested
the following: Need for a special legislation, Need for setting up of exclusive quasi-judicial body. Thus
the SICA came into existence in 1985 and BIFR started functioning from 1987

o (i) the accumulated losses of the company to be equal to or

more than its net worth i.e. its paid up capital plus its free
reserves (ii) the company should have completed five years
after incorporation under the Companies Act, 1956 (iii) it
should have 50 or more workers on any day of the 12 months
preceding the end of the financial year with reference to which
sickness is claimed. (iv) it should have a factory license.
A Brief History6
 Sick Industrial Companies (Special Provisions) Act, 1985
The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) may be
called the parent legislation for revival and rehabilitation of sick companies.
SICA was applicable to industrial companies as defined under the Industries
(Development and Regulation) Act, 1951. As noted above, industrial
company was considered “sick” if it had been registered for a minimum
period of 5 years, and had at the end of any financial year accumulated
losses equal to or exceeding its entire net worth. Therefore, the basis of
determining sickness of the industrial company
was “net worth” of the company, vis-à-vis its
accumulated losses”. SICA provided for
establishment of the Board for Industrial and
Financial Reconstruction (BIFR) and the
Appellate Authority for Industrial and
Financial Reconstruction (AAIFR) to
discharge various functions required to be
performed by such authorities under SICA.
 The Companies Act, 1956

The 1956 Act, as originally enacted, did not contain any provisions relating
to revival and rehabilitation of sick companies. The Companies (Second
Amendment) Act, 2002 enacted pursuant to recommendations of the Eradi
Committee inserted Part VIA consisting of ss. 424A to 424L of the 1956 Act.
As a result provisions for revival and rehabilitation of the sick industrial
6
SICA called for abatement of any reference pending before BIFR in case secured creditors representing
3/4th in value of the amount outstanding against financial assistance disbursed had taken measures under
s 23(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 ({SARFAESI Act”).

companies were incorporated in 1956 Act. Consequently, the definitions of

“industrial company”, “sick industrial company”, “operating agency”, and
“net worth” among others were also inserted in the 1956 Act. However,
Part VIA of the 1956 Act was not notified and was not made effective. As
such, SICA remained the relevant legal recourse for sick industrial
companies.
Under the 1956 Act, “sick industrial company” was defined to mean an
industrial company which had accumulated losses in any financial year
equal to 50% or more of its average net worth during 4 years immediately
preceding such financial year, or failed to repay its debts within any 3
consecutive quarters on demand made in writing for its repayment by a
creditor or creditors of such companies. As can be seen, the scope of the
provisions inserted in the 1956 Act was limited to industrial companies only.
However, for determination of sickness, besides the “net worth test”, the
1956 Act applied “liquidity test” as an alternative to determine whether
the company had become sick.
Moreover, the Companies (Second Amendment) Act, 2002, called for

establishment of National Company Law Tribunal (”The Tribunal”), and the
National Company Law Appellate Tribunal (“The Appellate Tribunal”). As
such all the powers vested in BIFR and AAIFR under SICA were proposed to
be transferred to the tribunal and the Appellate Tribunal respectively, under
the 1956 Act. However, it must be noted that the Tribunal and the
Appellate Tribunal could not be constituted under the 1956 Act due to
constitutional challenge.
 Sick Industrial Companies (Special Provisions) Repeal Act, 2013

The Sick Industrial Companies (Special Provisions) Repeal Act, 2013 (the
“SICA Repeal Act”) as the name suggests, sought to repeal SICA and
consequently dissolve BIFR and AAIFR. The SICA Repeal Act provided for
abatement of inquiry or reference or appeal before BIFR or AAIFR (as the
case may be), and allowed the industrial company to make reference to the
tribunal under Part VIA of the 1956 Act within 180 days from the
commencement of the SICA Repeal Act. Other transitional provisions were

also provided under SICA Repeal Act. However, it must be noted that the
SICA Repeal Act was not notified and hence was not made effective.
Therefore, the provisions of SICA, as they originally stood prior to the SICA
Amendment Act, continue to remain effective.
The Companies Act, 2013

The 2013 Act incorporated the provisions of the Companies (Second
Amendment) Act, 2002, though with changes.
 The 2013 Act extended the provisions to all types of companies, and
not necessarily industrial companies.
 Determination of sickness was not based on any parameters under
the 2013 Act as the power to determine sickness lied with the
tribunal.
 Further, the provisions were now “creditor-oriented”7.
 One may note specificity in the prescribed timelines besides other
major changes.
Provisions relating to revival and rehabilitation of sick companies contained

in Chapter XIX of 2013 Act ranging from s. 253 to s. 269. These provisions
were completely different from those under the preceding legislation.
Companies Act, 2013 Companies Act, 1956

Chapter XIX Part VIA
253 to s. 269 424A to 424L
253 Determination of sickness 424A
254 Application for revival and rehabilitation -
255 Exclusion of certain time in computing period of -
limitation
256 Appointment of interim administrator -
7
Provisions of the 2013 Act were seemingly creditor-driven instead of being company driven as they are
more inclined towards secured creditors. Secured creditors have been empowered to make an application
to the Tribunal for determination of sickness, and then for determination of measures in respect of the
sick company. Creditors, in the form of a committee, decide whether it is possible to revive and
rehabilitate the comp-any by adopting certain measures. Creditors again, in stipulated majority, approves
the scheme prepared by the company administrator before the same may be submitted to the Tribunal for
its sanction. Even during the implementation of the scheme, in case difficulties arise, the creditors may
apply for modification of the scheme or for winding up of the company.

257 Committee of creditors -

258 Order of Tribunal -
259 Appointment of administrator -
260 Powers and duties of company administrator 424H
261 Scheme of revival and rehabilitation 424D
262 Sanction of scheme 424D
263 Scheme to be binding
264 Implementation of scheme
265 Winding up of company on report of company 424G
administrator
266 Power of Tribunal to assess damages against 424K
delinquent directors etc.
267 Punishment for certain offences 424L
268 Bar of jurisdiction -
269 Rehabilitation and Insolvency Fund 441C
“The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited

to only industries companies, while the Companies Act, 2013 covers the
revival and rehabilitation of all companies, irrespective of their sector.
The determination of whether a company is sick, would no longer be
base on a situation where accumulated losses exceed the net worth.
Rather it would be determined on the basis whether the company is
able to pay its debts. The Companies Act, 2013 does not recognize the
role of all stakeholders in the revival and rehabilitation of a sick
company, and provisions predominantly revolve around secured
creditors, the fact that the Companies Act, 2013 recognizes the
presence of unsecured creditors, is felt only at the approval of the
scheme of revival and rehabilitation”
– Companies Act, 2013 Key Highlights and Analysis by PWC.
The aforesaid provisions under the Companies Act, 2013 relating to revival and
rehabilitation of sick companies (i.e. Chapter XIX Sections 253-269) now stands
omitted w.e.f. 15.11.2016 by the Insolvency and Bankruptcy Code, 2016 8 . The
discussion becomes academic, still important for tracing the historical evolution and
appreciating the change in reforms. The matter would now be covered under the
Corporate Insolvency Resolution Process (CIRP) provisions which are discussed in
detail in Module III of the course.
8
Clause 8 of the Eleventh Schedule of IBC 2016 read with Section 255 of IBC 2016

What happened to the pending cases before BIFR and AAIFR?

The MoF, vide notification nos. S.O. 3568(E) and 3569(E), has notified 1 December,
2016, and made provisions of the SICA Repeal Act operative from that date. The
Repeal Act (as amended by the IBC) inter alia provides for the following9:
 Repeal of the SICA and providing that such repeal shall not affect the order
sanctioning scheme under the SICA (i.e. the sanctioned scheme would be
implemented as sanctioned).
 Dissolution of the Board for Industrial and Financial Reconstruction (BIFR) and
the Appellate Authority for Industrial and Financial Reconstruction (AIFR).
 ABATEMENT of references/ inquiries/ appeals and all other proceedings that
were pending before the BIFR/ AIFR immediately before the appointed date.
THE EIGHTH SCHEDULE :: (See section 252)

AMENDMENT TO THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS)
REPEAL ACT, 2003 (1 OF 2004)
In section 4, for sub-clause (b), the following sub-clause shall be substituted,
namely—
(b) On such date as may be notified by the Central Government in this behalf, any appeal
preferred to the Appellate Authority or any reference made or inquiry pending to or before the
Board or any proceeding of whatever nature pending before the Appellate Authority or the Board
under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) shall stand
abated:
Provided that a company in respect of which such appeal or reference or inquiry stands abated
under this clause may make reference to the National Company Law Tribunal under the
Insolvency and Bankruptcy Code, 2016 within one hundred and eighty days from the
commencement of the Insolvency and Bankruptcy Code, 2016 in accordance with the provisions
of the Insolvency and Bankruptcy Code, 2016:
Provided further that no fees shall be payable for making such reference under Insolvency and
Bankruptcy Code, 2016 by a company whose appeal or reference or inquiry stands abated under
this clause.".
Why BIFR had to go?
The BIFR process was very time consuming. There were numerous opportunities for
multiple loops in the procedures which resulted in the case 'shuttling several times
between, BIFR and the Operating Agency at any given stage. This is in addition to the
delay caused by the possibilities of appeal at every stage in the proceedings. Goswami
Committee (1993) illustrates a delay profile of a random sample of 565 cases that were
decided upon by BIFR. The mean delay ·was 749 days; and for 19% of the cases, it took
more than three years to arrive at a decision. The main reasons for such delays were:
9
Also see NCLAT Decision in the matter of Hindustan Motors Ltd., Company Appeal (AT) 126 of 2017
dated 25.04.2017 appreciating the change,
http://nclat.nic.in/final_orders/Principal_Bench/2017/others/25042017AT1262017.pdf

 the quasi-judicial nature of BIFR proceedings, which depends on consensus at

almost all stages, and
 BIFR's clear preference for rehabilitation over winding up, unless repeatedly
proven ·otherwise.
BIFR's distinct preference for rehabilitation over winding up stemmed from the belief
that firms should be "saved" at all costs - all possibilities should be exhausted before
judging a case to be a lost cause. This was reflected in one of the recent Supreme Court
decisions also:
“Different situations can arise in the interplay between The Companies Act,
1956 and The Sick Industrial Companies (Special Provisions) Act, 1985
(“SICA”) [for instance, in the matter of winding up of a company: i) where
winding up proceedings are pending, but no order of winding up has been
passed against the company, and a reference is made to the BIFR; ii) where a
winding up order is passed by the Company Court but it is stayed in appeal and
a reference is made to the BIFR]. Whatever be the situation, whenever a
reference is made to the BIFR under Sections 15 and 16 of SICA, the provisions
of SICA would come into play and they would prevail over the provisions of the
Companies Act and proceedings under the Companies Act must give way to
proceedings under SICA.”10
However, as per Goswami Committee (1993)

Bad accounting norms and poor provisioning among secured creditors induces
banks and institutions to continue their exposure in sick firms, and support
otherwise untenable rehabilitation projects. Unsatisfactory provisioning implies
that many loans to sick units have not been sufficiently written down in the
books of banks and institutions. Winding up immediately forces secured
creditors to fully provide for such exposure, and write down the value to zero.
Since this looks awful in the account books, most banks and institutions have
been traditionally reluctant to push for winding up of unviable cases. Until
tainted accounts are clearly identified and properly provided for - a process that
will take another three years if the Narasimham Committee Report is faithfully
implemented - banks will continue to be biased towards servicing questionable
industrial accounts (via rehabilitation), instead of writing them off as bad debts
(through winding up). Given this inherent bias, the BIFR need not be an
additional guardian of rehabilitation11.
The Board's partiality towards rehabilitation has had three serious consequences:
10
Madura Coats Ltd. v. Modi Rubber Ltd. [Civil Appeal No. 1475 of 2006] decided on June 29, 2016,
Jagdish Singh Khehar, Madan B. Lokur and Chockalingam Nagappan, JJ.
11
It has been argued by some BIFR members that they purposely stress upon rehabilitation because of
two reasons. First, the preamble of SICA states the need to take "ameliorative" and "remedial" measures
"in public interest" - which ought to be interpreted as rehabilitation. Second, they feel that there is need to
counteract the eagerness of banks and institutions to get rid of bad cases, and opt for winding up.

 It has lengthened the process: increased the number of rehabilitation proposals

that are presented and contested by various parties.
 It has prevented BIFR from credibly using the threat of winding up to force
quick consensus: Winding up under section 20 of SICA is an area where BIFR
and the Appellate Authority (AAIFR) does not require consensus. The most
expeditious way of forcing parties to behave responsibly is to use a time-bound
threat of winding up. This is particularly true if the threat is section 20(4): where
BIFR can sell the assets of the company "in any such manner as it may deem
fit", and forward the proceeds to the High Court for distribution.
 It has given tremendous opportunities to unscrupulous promoters and,
occasionally, State Governments to delay matters.
The failure of BIFR and misuse of the provisions of SICA were being reported to the
extent that BIFR was itself termed sick12. Former Prime Minister and one of the chief
architects of the SICA Shri. V.P. Singh stated in 2001 that “BIFR” has failed13. One of
the major reasons for BIFR failure was attributed as “BIFR lacks professional expertise
in conserving cash, managing working capital and dealing with equity conversion
options, which are necessary to turn around a business.”14 The biggest criticism of the
system adopted by the BIFR under the provisions of SICA was that during
restructuring, control of the company was left in the hands of the old management. “If
the same people who were responsible for the downfall of the company take over the
revival process, there is a lack of confidence [among the creditors],” noted Abizer
Diwanji from EY15. The present IBC 2016 addresses all these issues which we would
discuss in the following modules and units of the course.
The Concept and Status of Industrial Sickness

The Committee on Industrial Sickness and Corporate Restructuring 16 in 1993
(Chairman: Omkar Goswami) notes:
At an elementary level, industrial sickness refers to an industrial or
manufacturing firm performing systematically worse than the average, not
covering its fixed costs, and frequently reneging on its debt repayment
12
Sick firms seek cure, but BIFR itself is sick, DNA, Sep 18, 2006, 10:42 PM IST.
13
BIFR has failed: VP Singh, Business Line, KOLKATA, Wednesday, March 07, 2001. “sick units
which have no hopes of recovery could not carry on'' and an alternative mechanism had to be devised to
tackle industrial sickness.”
14
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Deprived_of_adequate_insolvency_protection-
_Indian_companies_in_distress_are_struggling_to_restructure.pdf
15
Id.
16
http://reports.mca.gov.in/Reports/31-
Goswami%20committee%20of%20the%20industriai%20sickness%20and%20corporate%20restructuring,
%201993.pdf

obligations. There can be no second opinion about the growth of industrial

sickness (so defined) in India. It is pervasive across ownership (public or private
sector), across industries, across states, and across scale (small, medium, and
large). On at least two counts the problem of long term "sickness" is more severe
in India compared to all developed and most industrializing nations. First, being
a poor country, India can ill afford to lock up scarce financial as well as real
resources in persistently loss-making firms. Second, in most other countries such
firms cannot survive (in the Indian terminology, "remain sick") for long: these
either have to reorganize their assets, liabilities, product-mix, capital stock and
labour force, or retreat from the industry. It is a sad reflection of our notion of
opportunity cost of scarce resources that we maintain and exacerbate sickness
without economically viable restructuring or planned withdrawal. (para 2.0.1)
Industrial sickness arises 'out of bad financial structure and/or chronically

inefficient use of factors of production and/or poor market positioning 17 . Its
outcome is the locking up of scarce investible funds in/sub-optimal activities.
Given this outcome, an appropriate way of looking at sickness is to examine the
amount of outstanding credit locked up in sick industrial units. (para 2.1.1
It is important to note that Industrial sickness does not occur all of a sudden in the life
history of an industrial unit. In fact, it is a gradual process with distinct stages taking
from 5 to 7 years to corrode the health of a unit. An industrial unit just like a human
body. The human body18 is a healthy biological organism which, before it becomes sick,
generally passes through various stages. If the sickness continues for a long period it
may become chronic. In case no treatment is given at the initial stage, it may go beyond
control and result in the death of the organism. Likewise, an industrial unit also passes
through various stages before it becomes sick.
Sickness does not develop at once except due to accidents, natural catastrophies or other
external factors causing heavy irrecoverable loss to the industry. In most of the cases,
sickness is bred within the unit itself. A healthy unit may grow sick temporarily and
17
Nearly 15 factors have been cited as being responsible for the sickness of industrial units. These can be
classified as extraneous and inherent. The extraneous factors are: (1) recessionary trend, (2) slack
demand, (3) sudden fluctuations in demand from large buyers, (4) power shortage, (5) inadequate and
irregular supply of critical raw materials, (6) delay in payments by large companies, (7) steep increase in
project costs leading to increase in cost of operation and the consequent difficulty in competing with
others, and (8) uneconomic pricing formula decided by the government. The inherent factors are: (1)
disturbed industrial relations, (2) absence or delay in modernization, (3) inefficient or non-
professionalized management, (4) diversion of funds, (5) faulty production programme and product-mix,
(6) continuous financial losses and (7) obsolete machinery.
18
Bidani, S N & Mitra P K [1982] : Industrial Sickness - Identification and Rehabilitation. Vision Books
Pvt. Ltd., New Delhi; p. 2.

recover or vice-versa. Factors that cause sickness in an industrial unit could be internal
or external. The external factors generally affect all units in the same group while the
internal factors affect a particular unit only. According to NCAER,
"Sickness is defined in terms of financial viability consisting of three
independent elements of equal emphasis and weight, viz., profitability, liquidity
and solvency represented by cash profit or loss; net working capital; and net
worth respectively. When all these parameters show positive figures, the unit's
financial viability will be sound and normal. Where one of them shows a
negative figure, the unit could be regarded as tending towards sickness; where
two of them show negative figures, it would be a case of incipient sickness;
where all of them show negative figures the unit may be termed as sick"
[NCAER; 1986]19.
On the basis of the above definition, the organic process which generally passes through
various stages of sickness in an industrial unit may be illustrated as follows:
Stage I : Tending
Stage III : Sick Unit
• Cash Profit / Loss = Towards Sickness • Two or more in
+ minus
• Net Working Capital • Cash Profit / Loss = • All in minus
=+ Minus
• Net Worth = + • Net Working Capital
=+
• Net Worth = +
Stage II: Incipient
Healthy Unit
Sickness
RBI maintains the data relating to Position of Sick SSI Units and Sick/ Weak Non-SSI
Units Financed by Scheduled Commercial Banks20 which is as follows for some years.
Year (end- Units Amount Outstanding
March) (Amount in ₹ Billion)
1994 256452 36.80

2003 167980 57.06
2012 85591 67.90
2013 220492* 124.42
2014 465492 263.11
2015 534844 257.14
2016 480280 326.74
*The definition of sickness was revised with effect from November 01, 2012. For details refer the Notes
on Tables21.
19
National Council of Applied Economic Research (NCAER) [1986] : Report on the Activities of
National Society for Prevention of Industrial Sickness. New Delhi
20
https://rbi.org.in/Scripts/PublicationsView.aspx?id=17170

STRESSED ASSETS22:
Now stressed assets are getting increased attention as the trend of deteriorating asset quality
has emerged as a big economic risk for the Indian banking sector. Stressed assets are a
powerful indicator of the health of the banking system. To understand stressed assets we have
to understand NPA and Restructured assets. This is because:
Stressed assets = NPAs + Restructured loans + Written off assets
Assets of the banking system comprises of loans given and investment (in bonds) made by
banks. Quality of the asset indicates how much of the loans taken by the borrowers are repaid
in the form of interests and principal. The most important scale of asset quality is Non
Performing Assets (NPA). An NPA means interest or principal is not repaid by the borrower
during a specified time period.
Bad assets are further classified into substandard asset, doubtful asset, and loss assets
depending upon how long a loan remains as an NPA.
Measuring stressed assets

But NPA alone doesn’t tell the whole story of bad asset quality of loans given by banks. Some
of the loans are restructured by banks by giving a further opportunity to the borrower if they
default. This opportunity is in the form of an extended time period for repayment and a reduced
interest rate or such soft conditions. Hence a new classification is made in the form of stressed
assets that comprises restructured loans and written off assets besides NPAs.
Stressed assets = NPAs + Restructured loans + Written off assets
What is an NPA?
A loan whose interest and/or installment of principal have remained 'overdue ' (not paid) for a
period of 90 days is considered as NPA.
What is restructured loans?

Restructured asset or loan are that assets which got an extended repayment period, reduced
interest rate, converting a part of the loan into equity, providing additional financing, or some
combination of these measures. Hence, under restructuring a bad loan is modified as a new
loan. A restructured loan also indicates bad asset quality of banks. This is because a
restructured loan was a past NPA or it has been modified into a new loan. Whether the
borrower will repay it in future remains a risky element. Corporate Debt Restructuring
Mechanism (CDM) allows restructuring of loans.
What is written off assets?

Written off assets are those the bank or lender doesn’t count the money borrower owes to
it. The financial statement of the bank will indicate that the written off loans are compensated
through some other way. There is no meaning that the borrower is pardoned or got exempted
from payment.
The ratio of stressed assets to gross advances of the Indian banking system is increasing from
2013 onwards. It has risen from around 6 per cent at the end of March 2011 to 11.1 per cent by
March 2015. Public Sector Banks have the highest stressed asset ratio 13.5 per cent of total
advances as of March 2015, compared to 4.6 per cent in the case of private sector banks.
Source: IndianEconomy.net
21
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CE273GR011112.pdf
22
http://www.indianeconomy.net/splclassroom/145/what-is-stressed-assets/

Non-Performing Assets (NPA): Concept and Scope
Gross NPAs which stood at Rs 1.3 lakh crore as on March 2012, have
increased by a whopping 415.38% at Rs 6.7 lakh crore as on September 2016
Zee Business23
As a guardian of monetary policy, Reserve Bank of India (RBI) keeps an eye on the bad
debts and NPAs. In this regard RBI prescribes prudential standards to regulate the
activities of commercial and other banks. To prescribe a uniform and consistent
approach for classification of assets by banks and to ensure an adequate level of
provisioning on those assets on the basis of an objective criteria, RBI keeps updating the
Master Circular on Prudential norms on Income Recognition, Asset Classification and
Provisioning pertaining to Advances (the Master Circular)24. As part of its supervisory
processes, RBI also assesses the extent of compliance by banks with prudential norms
on income recognition, asset classification and provisioning.
As noted earlier, as per the new rules, under Section 35AA - the central bank is entitled
to issue directions to any banking company or banking companies to initiate insolvency
resolution process in respect of a default under the provisions of the Insolvency and
Bankruptcy Code.
As per the Master Circular an asset, including a leased asset, becomes non-performing
when it ceases to generate income for the bank25.
A non-performing asset (NPA) is a loan or an advance where;

 interest and/ or instalment of principal remain overdue26 for a period of more
than 90 days in respect of a term loan,
 the account remains ‘out of order’ 27 , in respect of an Overdraft/Cash Credit
(OD/CC),
23
http://www.zeebiz.com/india/news-new-npa-norms-give-more-power-to-rbi-to-settle-bad-loans-but-is-
it-that-easy-15792, also see https://qz.com/1009293/indias-npas-what-is-rbis-solution-for-the-154-billion-
bad-loan-problem/
Indian banks are in deep trouble. Their pile of bad loans, or stressed assets, is close to Rs10 lakh
crore ($154 billion) now, which is more than the GDP of at least 137 countries. And what’s
more, it is only growing. Stressed assets, which include non-performing assets (NPAs) and
restructured loans, form some 12% of the total loans in Indian banking now.
24
RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16, dated July 1, 2015, available at
https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9908
25
Para 2.1.1 of Master Circular
26
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed
by the bank.

 the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
 the instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops,
 the instalment of principal or interest thereon remains overdue for one crop
season for long duration crops,
 the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction undertaken in terms of guidelines on
securitisation dated February 1, 2006.
 in respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid for
a period of 90 days from the specified due date for payment.
Categories of NPAs
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:
Sub-standard Assets // Doubtful Assets // Loss Assets
Sub-standard Assets: With effect from March 31, 2005, a sub-standard asset would be
one, which has remained NPA for a period less than or equal to 12 months. Such an
asset will have well defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
Doubtful Assets: With effect from March 31, 2005, an asset would be classified as
doubtful if it has remained in the substandard category for a period of 12 months. A
loan classified as doubtful has all the weaknesses inherent in assets that were classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, – on the basis of currently known facts, conditions and values –
highly questionable and improbable.
Loss Assets: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly.
In other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recovery value.
27
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess
of the sanctioned limit/drawing power for 90 days. In cases where the outstanding balance in the principal
operating account is less than the sanctioned limit/drawing power, but there are no credits continuously
for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during
the same period, these accounts should be treated as 'out of order'.

RECOVERY OF Debt: Mechanisms

Recovery of debts/loans remains one of the greatest challenges for the banks, in spite of
the fact that several measures were taken by the Government to ameliorate the situation.
Let us briefly discuss these measures and its status:
A civil court of relevant jurisdiction is the basic mechanism that is available to any
creditor for debt recovery. If the loan is backed by security, this is enforced as a contract
under the law28.
1993: Recovery through Debt Recovery Tribunals (DRTs)

The Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunal
(DRATs) were established under the Recovery of Debts Due to Banks and Financial
Institutions Act (RDDBFI Act), 1993 with the specific objective of providing
expeditious adjudication and recovery of debts due to Banks and Financial Institution29.
Statement of Objects and Reasons of the aforesaid law is as follows:
Banks and financial institutions at present experience considerable difficulties in

recovering loans and enforcement of securities charged with them. The existing
procedure for recovery of debts due to the banks and financial institutions has
blocked a significant portion of their funds in unproductive assets, the value of
which deteriorates with the passage of time. The Committee on the Financial
System headed by Shri M. Narasimham has considered the setting up of the
Special Tribunals with special powers for adjudication of such matters and
speedy recovery as critical to the successful implementation of the financial
sector reforms. An urgent need was, therefore, felt to work out a suitable
mechanism through which the dues to the banks and financial institutions could
be realized without delay. In 1981, a Committee under the Chairmanship of Shri
T. Tiwari had examined the legal and other difficulties faced by banks and
financial institutions and suggested remedial measures including changes in law.
The Tiwari Committee had also suggested setting up of Special Tribunals for
recovery of dues of the banks and financial institutions by following a summary
procedure. The setting up of Special Tribunals will not only fulfill a long-felt
need, but also will be an important step in the implementation of the Report of
Narasimham Committee. Whereas on 30th September, 1990 more than fifteen
lakhs of cases filed by the public sector banks and about 304 cases filed by the
financial institutions were pending in various courts, recovery of debts involved
more than Rs.5622 crores in dues of Public Sector Banks and about Rs.391
crores of dues of the financial institutions. The locking up of such huge amount
of public money in litigation prevents proper utilization and recycling of the
funds for the development of the country.
The DRT mode of recovery may be utilized only when the amount of debt due to bank
or financial institution or to a consortium of banks or financial institutions is not less
than 10 lakhs rupees (or such other amount, being not less than 1 lakh rupees to be
notified by the Government).
28
BLRC Report para 3.3
29
https://www.drt.gov.in/, Presently 38 DRT's and 5 DRAT's are functioning in India.

DRTs were expected to dispose of the cases within a maximum period of six months.
But, in practice, it takes years to realise the dues through DRTs. There are several
reasons for such delay30, some of which are enumerated as follows:
 The number of cases handled by DRTs has increased manifold, but sufficient
number of DRTs have not been established.
 In many DRTs, the posts of presiding officers have been vacant for quite a
while, resulting thereby in a large pendency of cases.
 Often, the borrowers and guarantors raise frivolous issues leading to prolonged
hearing and, consequently, delays.
 Once the case is decided by the DRT, the presiding officers issue recovery
certificates which are to be executed through recovery officers appointed by the
DRT. Sufficient number of recovery officers is not available to handle the large
number of cases.
 The execution of recovery certificates by the recovery officers often gets
delayed following disputes by various claimants, problems in identifying
properties, and so on.
2002: Recovery under the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 (SARFAESI):
As noted above, DRT could not speed up the recovery on one hand and on the other the
strict civil law requirements rendered almost futile the attachment and foreclosure of the
assets given as security for the loan. Further, the balance sheets of the banks and
financial institutions were turning red due to heavy mandatory provisions for NPAs.
Realizing that every fifth borrower is a defaulter, the Government was under pressure to
make adequate provisions for the recovery of the loans and also to foreclose the
security31. This gave rise to the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 ('the Securitisation Act') which aims to
achieve these twin objectives besides providing for a broad legal framework for asset
securitisation and asset reconstruction.
Under certain specified conditions, SARFAESI 2002 enables secured creditors to take
possession of collateral without requiring the involvement of a court or tribunal. This law
provides for actions by secured creditors to take precedence over a reference by a debtor to
BIFR. The DRT is the forum for appeals against such recovery. The Statement of Objects
and Reasons of SARVAESI provides more clarity as follows:
30
Also see Union of India & Ors. Vs. Debts Recovery Tribunal Bar Association & ANR., [Civil Appeal
Nos.617-618 of 2013 arising out of SLP (C) Nos. 22808-22809 of 2010] for the constraints faced by DRT
highlighted by Hon’ble Supreme Court.
31
http://www.mondaq.com/india/x/22031/securitization+structured+finance/The+Securitisation+and+Reco
nstruction+of+Financial+Assets+and+Enforcement+of+Security+Interest+Act+2002+An+Overview+of+
the+Provisions

The financial sector has been one of the key drivers in India's efforts to achieve
success in rapidly developing its economy. While the banking industry in India
is progressively complying with the international prudential norms and
accounting practices, there are certain areas in which the banking and financial
sector do not have a level playing field as compared to other participants in the
financial markets in the world. There is no legal provision for facilitating
securitisation of financial assets of banks and financial institutions. Further,
unlike international banks, the banks and financial institutions in India do not
have power to take possession of securities and sell them. Our existing legal
framework relating to commercial transactions has not kept pace with the
changing commercial practices and financial sector reforms. This has resulted in
slow pace of recovery of defaulting loans and mounting levels of nonperforming
assets of banks and financial institutions. Narasimham Committee I and II and
Andhyarujina Committee constituted by the Central Government for the purpose
of examining banking sector reforms have considered the need for changes in
the legal system in respect of these areas. These Committees, inter alia, have
suggested enactment of a new legislation for securitisation and empowering
banks and financial institutions to take possession of the securities and to sell
them without the intervention of the court. Acting on these suggestions, the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to
regulate securitisition and reconstruction of financial assets and enforcement of
security interest and for matters connected therewith or incidental thereto. The
provisions of the Ordinance would enable banks and financial institutions to
realise long-term assets, manage problem of liquidity, asset liability mismatches
and improve recovery by exercising powers to take possession of securities, sell
them and reduce nonperforming assets by adopting measures for recovery or
reconstruction.
SAFRAESI Act is a powerful instrument in the hands of the banks and financial
institutions (FIs) as secured creditors. This Act helps them enforce securities held as
collateral to loans disbursed by them should such loans turn out as non-performing
assets (NPAs) during the currency of the loan without interference from the Courts32.
This particular aspect was constitutionally challenged before the Hon’ble Supreme
Court in the case of Mardia Chemicals 33 wherein the Supreme Court upheld the
constitutional validity of almost all provisions of the Act, except, section 17(2)
declaring it unconstitutional34.
32
If the borrower becomes a ‘wilful defaulter’ as defined by the RBI Master Circular on wilful defaulters
vide RBI circular (RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2015)
33
Mardia Chemicals and others v. Union of India and others (2004) 4 SCC 311
34
Requirement of deposit of 75% of amount claimed before entertaining an appeal (petition) under
section 17 of the Act is an oppressive, onerous and arbitrary condition against all the canons of
reasonableness. Condition is invalid and struck down.

Process of Securitisation
Simply stated, ‘securitization’ is a process by which the ‘originator’s of assets like loans
which are illiquid, are able to transfer such assets to a ‘special purpose vehicle’
transaction can be structured with a wide variety or ‘credit enhancement’ to make the
deals attractive for investors. The most important, however, is the guarantees of credit
quality35. There are two purposes for securitization. One, the securitized assets go off
the balance sheet of the originator and so the asset-base is pruned down to that extent,
thereby reducing the regulatory capital requirements to support the assets. Second the
asset portfolio is liquidated, releasing cash, which in turn reduces the need for demand
and time liabilities that are subject to statutory reserves36.
Source: www.investopedia.com/ask/answers/07/securitization.asp
Asset Reconstruction Companies (ARCs)

The SARFAESI Act gives detailed provisions for the formation and activities of Asset
Securitization Companies (SCs) and Reconstruction Companies (RCs). Scope of their
activities, capital requirements, funding etc. are given by the Act. RBI is the regulator
for these institutions37. As on August 31, 2016, there are 19 Securitisation Companies/
Reconstruction Companies (SC/RCs) registered with the Bank 38 . Compared to the
35
Also see Guidelines on Securitisation of Standard Assets, RBI No. 2005-06/294 DBOD.NO.BP.BC.60 /
21.04.048/2005-06, February 1, 2006, available at
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2723, read with Revisions to the Guidelines on
Securitisation Transactions, May, 2012 https://rbi.org.in/scripts/NotificationUser.aspx?Id=7184
36
http://kpcraoindia.blogspot.in/2012/04/process-of-securitisation-under.html
37
The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and
Directions, 2003, https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9901
38
https://rbidocs.rbi.org.in/rdocs/content/pdfs/LSCRCRBI07092016.pdf

magnitude of the problem of NPAs this number seems to be very less which gives the
rationale for introducing a new genre of professionals called Insolvency Professionals.
SARFAESI, though proved to be an important tool for loan recovery, it too had many
challenges two of which highlighted by BLRC, i.e.
 Value destruction in corporate distress when a firm has secured credit, and fails
on its obligations, the present framework (SARFAESI) emphasises secured
creditors taking control of the assets which were pledged to them. This tends to
disrupt the working of the company. The present frameworks do not allow for
the possibility of protecting the firm as a going concern while protecting the
cash flows of secured creditors.
 Poor environment for credit While SARFAESI has given rights to creditors on
secured credit, the overall recovery rates remain low particularly when measured
on an NPV basis. This creates a bias in favour of lending to a small set of very
safe borrowers, and an emphasis on using more equity financing which is
expensive. This makes many projects unviable. Better access to credit for new
entrepreneurs will create greater economic dynamism by increasing competition.
VOLUNTARY MECHANISMS
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.
However, delay in agreement amongst different lending institutions often comes in the
way of such endeavors. Based on the experience in countries like the UK, Thailand,
Korea, Malaysia, 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 banks39.
The Corporate Debt Restructuring (CDR)

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
39
http://www.cdrindia.org/aboutus.htm

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-I40, while cases of
doubtful assets are covered under Category-II41.
Reference to CDR Mechanism may be triggered by:

 Any or more of the creditors having minimum 20% share in either working
capital or term finance, or
 By the concerned corporate, if supported by a bank/FI having minimum 20%
share as above.
It may be emphasized here that, in no case, the requests of any corporate indulging in
fraud or misfeasance, even in a single bank, can be considered for restructuring under
CDR System. However, 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.
The Reserve Bank of India rolled out the Corporate Debt Restructuring Guidelines in
200142, based on the experience of U.K, Thailand and Korea, after various efforts made
for restructuring debt ridden companies failed to meet their objectives. Structure of
CDR System: The edifice of the CDR Mechanism in India stands on the strength of a
three-tier structure:
 CDR Standing Forum
 CDR Empowered Group
 CDR Cell
40
Accounts, which are classified as `standard' and `substandard' in the books of the lenders, restructured
under the first category
41
If the account has been classified as standard/substandard in the books of at least 90 per cent of the
lenders (by value), the same would be treated as standard/substandard only for the purpose of judging the
account as eligible for CDR in the books of the remaining 10 per cent of the lenders . Accounts which are
classified as `doubtful' in the books of the lenders would be restructured under the second category
42
See, Circular DBOD No. BP.BC. 15/21.04.114/2000-01 dated August 23, 2001, also see Corporate
Debt Restructuring Master Circular dated June 28, 2006 alongwith revised guidelines on Corporate Debt
Restructuring Mechanism issued by Reserve Bank of India on November 10, 2005

The legal basis to the CDR System is 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.
Similarly, debtors are required to execute the DCA, either at the time of reference to
CDR Cell or at the time of original loan documentation (for future cases). 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. ‘Stand Still’ is necessary for enabling the CDR
System to undertake the necessary debt restructuring exercise without any outside
intervention, judicial or otherwise. However, the ‘stand still’ is applicable only to any
civil action, either by the borrower or any lender against the other party, and does not
cover any criminal action.
Besides, the borrower needs to undertake that during the ‘stand still’ period the
documents will stand extended for the purpose of limitation and that he would not
approach any other authority for any relief and the directors of the company will not
resign from the Board of Directors during the ‘stand still’ period.
Proposals under CDR entail mainly the following43:

 Extending repayment period of loans;
 Converting un-serviced portion of interest into term loans; and
 Reducing rate of interest on outstanding advances.
Objectives of the CDR Guidelines44:

 To ensure timely and transparent mechanism for restructuring of corporate debts;
 Scheme will be outside the purview of BIFR, DRT and other legal proceedings;
 Aim at preserving the viable corporate that are affected by certain internal and external
factors;
 Minimize the losses to the creditors and other stake holders;
 The procedure followed will be orderly and co-ordinated restructuring program.
Main points of the CDR scheme45:
43
http://zeus.firm.in/wp-content/uploads/Corporate-Debet-Restructuring.pdf
44
See, Ramanujan, Mergers et al – issues, implications and case laws in corporate restructuring, 3rd Edi,
Lexis Nexis Butterworths Wadhwa Nagpur (2012).

 A cooling period of 90 days before declaring accounts of the company as non-

performing assets (NPA);
 Once a company makes an application for CDR the lending company/lender will not
mention that loan as bad loans;
 The arrangement (non-statutory) will be based on debtor-creditor relationship and will
not be valid for a period of more than 3 years;
 The arrangement will have a “stand still” clause for a period of 90 or 180 days causing
to halt judicial and other proceedings.
ORPORATE DEBT RESTRUCTURING (CDR) CELL: PROGRESS REPORT:

(As on June 30, 2017)46
Strategic Debt Restructuring (SDR)

Under SDR, banks who have given loans to a corporate borrower gets the right to
convert the full or part of their loans into equity shares in the loan taken company. The
45
https://www.rbi.org.in/upload/notification/pdfs/67158.pdf
46
http://www.cdrindia.org/pdf/CDR-Performance-June-2017-11082017.pdf

SDR scheme which was introduced by the RBI47 in June 2015 thus helps banks recover
their loans by taking control of the distressed listed companies48.
The SDR an initiative can be taken by the group of banks or JLF that have given loans
to the particular defaulted entity. The Joint Lender Forum (JLF) is a committee
comprised of the entire bankers who have given loans to a potentially stressed or
stressed borrower. At present, banks can form a JLF if the account by a borrower is
classified as Special Mention Account 2 (not paid any money back during the last 60
days).
The RBI in its "Framework for Revitalizing Distressed Assets in the Economy -
Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)" 49 has
suggested change of management as a part of restructuring of stressed assets. Change
of management means share transfer from the promoter to the banks.
The SDR gives banks more power in the management of the company who has taken
loan and has defaulted. The RBI has modified the scheme later to give a correct shape.
The Joint Lenders Forum/Corporate Restructuring Cell can initiate the SDR scheme
The JLF/Corporate Debt Restructuring Cell (CDR) may consider the following options
when a loan is restructured:
 Possibility of transferring equity of the company by promoters to the lenders
 Promoters infusing more equity into their companies;
 Transfer of the promoters’ holdings to a security trustee or an escrow
arrangement till turnaround of company.
Following are the major features of the SDR Scheme.

 At the time of initial restructuring, the JLF must incorporate an option to convert
the entire loan (including unpaid interest), or part thereof, into shares in the
company in the event the borrower is not able to achieve the ‘critical conditions’
as stipulated in the restructuring package.
 Provisions of the SDR would also be applicable to the accounts if necessary
clauses are included in the agreement between the banks and borrower;
 The decision on invoking the SDR by converting the whole or part of the loan
into equity shares should be taken by the JLF. The decision should be
documented and approved by the majority of the JLF members (minimum of
75% of creditors by value and 60% of creditors by number).
 In order to achieve the change in ownership, the lenders under the JLF should
collectively become the majority shareholder by conversion of their dues from
the borrower into equity
47
Strategic Debt Restructuring Scheme, RBI/2014-15/627 DBR.BP.BC.No.101/21.04.132/2014-15 June
8, 2015 available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9767
48
http://www.indianeconomy.net/splclassroom/218/what-is-strategic-debt-restructuring-sdrscheme
49
February 26, 2014 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8754&Mode=0

 After the conversion, all lenders under the JLF must collectively hold 51% or
more of the equity shares issued by the company;
 The basic purpose of SDR is to ensure more stake of promoters in reviving
stressed accounts and providing banks with enhanced capabilities to initiate
change of ownership, where necessary, in accounts which fail to achieve the
agreed critical conditions and viability milestones. SDR cannot be used for any
other reason.
Examples
GTL Infrastructure Limited, a telecom tower company, builds, owns, operates, and
maintains passive telecom infrastructure sites in India. The company provides telecom
towers on a shared basis to various telecom operators to host their network
components on cell site. GTL Infrastructure owes its lender more than Rs.5000 crore.
Lenders of GTL Infrastructure such as State Bank of India, IDBI Bank, United Bank of
India and Dena Bank planned to takeover its ownership and management by invoking
SDR50.
DIFFERENCE BETWEEN CDR AND SDR

The reorganization of a company's
outstanding obligations by reducing the SDR scheme allows banks to convert their
burden of the debts on the company by outstanding loans into equity in a
decreasing the rates paid and increasing company if even restructuring has not
the time the company has to pay the helped.
obligation back.
It has a three tier structure which includes
A consortium of lending institutions
CDR Cell, Empowered Group and a
namely Joint Lender’s Forum is formed
Standing Forum. The Standing Forum is
which will decide on the conversion of
the top tier which decides on the
debt into equity.
restructuring.
Sustainable Structuring of Stressed Assets (S4A)

In order to further strengthen the lenders’ ability to deal with stressed assets and to put
real assets back on track by providing an avenue for reworking the financial structure of
entities facing genuine difficulties, the Reserve Bank of India issued guidelines on a
‘Scheme for Sustainable Structuring of Stressed Assets’ on June 13, 2016.
RBI Press Release51
Resolution of large borrowal accounts which are facing severe financial difficulties
may, inter-alia, require co-ordinated deep financial restructuring which often involves a
50
See Latest Report GTL Infra aims to be debt free in 3-4 years,
http://www.thehindubusinessline.com/info-tech/gtl-infra-aims-to-be-debt-free-in-34-
years/article9665826.ece
51
https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=37210

substantial write-down of debt and/or making large provisions. Often such high write-
downs act as a disincentive to lenders to effect a sustainable change in the liability
structure of borrows facing stress. Banks have also represented for a regulatory
framework which would facilitate lenders taking up the exercise of reworking of the
liability structure of companies to which they have significant exposures, in the context
of asset quality stress currently faced by them.
Accordingly, the Reserve Bank, after due consultation with lenders, has formulated the
‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) as an optional
framework for the resolution of large stressed accounts. The S4A envisages
determination of the sustainable debt level for a stressed borrower, and bifurcation of
the outstanding debt into sustainable debt and equity/quasi-equity instruments which are
expected to provide upside to the lenders when the borrower turns around.
In order to make sure that that the entire exercise is carried out in a transparent and
prudent manner, S4A envisages that the resolution plan will be prepared by credible
professional agencies, while an Overseeing Committee, set up by the Indian Banks
Association, in consultation with the RBI, comprising of eminent experts will
independently review the processes involved in preparation of the resolution plan, under
the S4A, for reasonableness and adherence to the provisions of these guidelines, and
opine on it.
The S4A Scheme aims at deep financial restructuring of big debted projects by allowing
lender (bank) to acquire equity of the stressed project. In this context, the scheme makes
financial restructuring of large projects at the same time helping the lender's ability to
deal with such stressed assets. It is intended to restore the flow of credit to critical
sectors including infrastructure52.
Following are the main features of the scheme:

 For an account to be eligible for restructuring under the S4A Scheme, the total
loans by all institutional lenders in the account should exceed Rs 500 crore
(including rupee loans, foreign currency loans/external commercial borrowings).
 The lending bank should hire an independent agency to evaluate how much of
the debt is ‘sustainable’.
 The project should have started its commercial operations and there should be
cash flows from the project.
 The project allows banks to take equity participation in the stressed project.
 Test of Sustainability: Major feature of the scheme is that it envisages
determination of the sustainable debt level for a stressed borrower. Loans will be
divided into sustainable and unsustainable components.
 A Techno-economic viability (TEV) study by the bank/ Joint Lenders
Forum/consortium of lenders should assess the debt level as sustainable. A
sustainable debt is the one where the principal value of all debts owed to
institutional lenders can be repaid if the future cash flows (return from the
52
http://www.indianeconomy.net/splclassroom/351/what-is-scheme-for-sustainable-structuring-of-
stressed-assets-s4a/

project) remain at their current level. For the scheme to apply, sustainable debt
should not be less than 50 percent of all debts.
 The scheme allows banks to rework stressed loans under the oversight of an
external agency. This ensures transparency at the same time protecting bankers
from undue scrutiny by investigative agencies.
 The scheme involves substantial write-downs and/or making large provisions.
Difference between Strategic Debt Restructuring Scheme and S4A scheme

Under the S4A Scheme, banks would be to allow existing promoter to continue in the
management even while being a minority shareholder. Whereas in the case of SDR, the
promoter is delinked and ownership is changed. Similarly, under the S4A Scheme, the
lenders also have an option of holding optionally convertible debentures instead of
equity, which might be more preferred option. But in the case of SDR only equity
holding is allowed.
One can see from the aforesaid discussion that RBI has tried to evolve many
mechanisms so as to help the debtors and creditors resolve their issues amicably and
deal with the situations of stressed assets effectively. However, these mechanism range
from statutory to voluntary (being governed legally by agreements) and a bit
complicated. The IBC 2016 provides for a one-stop-shop solution for handling the
issue of corporate insolvency resolution process with a strict timelines, regulated
professionals and clear processes and procedures.

Online Course in Insolvency Laws Covers Sick Companies Recovery

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Online Course in Insolvency Laws Covers Sick Companies Recovery

Uploaded by

Copyright:

Available Formats

Three Months Certificate Course (Online) in

Insolvency and Bankruptcy Laws and Procedure

Module 1: Introduction to Insolvency and Bankruptcy Regime in India

Unit-4: Sick Companies and Recovery of Debt1

An Act to make, in the public interest, special provisions with a view to

The legislative framework for revival and rehabilitation of sick companies

In the wake of sickness in the country’s industrial climate prevailing in the

Copyright @ School of Corporate Law, IICA Page 1 of 26

recommend suitable remedies therefore. Based on the recommendations of

The main objective of SICA is to determine sickness and expedite the

SICA applied to companies both in public and private sectors owning

Copyright @ School of Corporate Law, IICA Page 2 of 26

o (i) the accumulated losses of the company to be equal to or

 The Companies Act, 1956

Copyright @ School of Corporate Law, IICA Page 3 of 26

companies were incorporated in 1956 Act. Consequently, the definitions of

Moreover, the Companies (Second Amendment) Act, 2002, called for

 Sick Industrial Companies (Special Provisions) Repeal Act, 2013

Copyright @ School of Corporate Law, IICA Page 4 of 26

The Companies Act, 2013

Provisions relating to revival and rehabilitation of sick companies contained

Companies Act, 2013 Companies Act, 1956

Copyright @ School of Corporate Law, IICA Page 5 of 26

257 Committee of creditors -

“The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited

– Companies Act, 2013 Key Highlights and Analysis by PWC.

Copyright @ School of Corporate Law, IICA Page 6 of 26

What happened to the pending cases before BIFR and AAIFR?

THE EIGHTH SCHEDULE :: (See section 252)

Why BIFR had to go?

Copyright @ School of Corporate Law, IICA Page 7 of 26

 the quasi-judicial nature of BIFR proceedings, which depends on consensus at

However, as per Goswami Committee (1993)

Copyright @ School of Corporate Law, IICA Page 8 of 26

 It has lengthened the process: increased the number of rehabilitation proposals

The Concept and Status of Industrial Sickness

Copyright @ School of Corporate Law, IICA Page 9 of 26

obligations. There can be no second opinion about the growth of industrial

Industrial sickness arises 'out of bad financial structure and/or chronically

Copyright @ School of Corporate Law, IICA Page 10 of 26

1994 256452 36.80

Copyright @ School of Corporate Law, IICA Page 11 of 26

Measuring stressed assets

What is restructured loans?

What is written off assets?

Copyright @ School of Corporate Law, IICA Page 12 of 26

Non-Performing Assets (NPA): Concept and Scope

A non-performing asset (NPA) is a loan or an advance where;

Copyright @ School of Corporate Law, IICA Page 13 of 26

Sub-standard Assets // Doubtful Assets // Loss Assets

Copyright @ School of Corporate Law, IICA Page 14 of 26

RECOVERY OF Debt: Mechanisms

1993: Recovery through Debt Recovery Tribunals (DRTs)

Banks and financial institutions at present experience considerable difficulties in

Copyright @ School of Corporate Law, IICA Page 15 of 26

2002: Recovery under the Securitisation and Reconstruction of Financial

Copyright @ School of Corporate Law, IICA Page 16 of 26

Copyright @ School of Corporate Law, IICA Page 17 of 26

Asset Reconstruction Companies (ARCs)

Copyright @ School of Corporate Law, IICA Page 18 of 26

The Corporate Debt Restructuring (CDR)

Copyright @ School of Corporate Law, IICA Page 19 of 26

institutions together have an outstanding aggregate exposure of Rs.100 million and