RBIs Strategic Debt Restructuring Scheme

Indian Banks are witnessing rising NPAs due to the slowdown in the Indian economy and high interest costs. The Reserve Bank of India has introduced various measures for controlling NPAs in the Bank including Asset Reconstruction Companies, SARFESI Act, Joint Lenders Forum (JLF), etc., However, the NPA figure in banks continue to remain high and hence the RBI has recently introduced the Strategic Debt Restructuring Scheme which is aimed at improving the working of banks faced with defaulters. This Scheme is about the terms that banks can write into the loan agreements, which will kick in at the time of default.

The RBI in its "Framework for Revitalizing Distressed Assets in the Economy - Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)" has suggested change of management as a part of restructuring of stressed assets. With this principle in view and to ensure that the shareholders bear the first loss rather than the debt holders, JLF/Corporate Debt Restructuring Cell (CDR) may consider the following options when a loan is restructured:

• The possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices;
• Promoters infusing more equity into their companies;
• Transfer of the promoter holdings to a security trustee or an escrow arrangement till turnaround of company. This will enable a change in management controlling, should lenders favour it.

A large number of borrowers in India are in a state of default to their lenders, such as banks. Hence, the RBI suggests that Joint Lenders' Forum (JLF) should actively consider a change in ownership and take necessary action.

IMPLEMENTATION:

• No loans will be restructured without conforming to the terms specified in the Strategic Debt Restructuring Scheme.
• At the time of initial restructuring, Joint Lender Forums will incorporate, in the terms and conditions attached to the restructured loan/s agreed with the borrower, an option to convert the entire loan, or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones.
• The bank during initial restructuring will require the borrower to provide the necessary approvals/authorizations to enable the lenders to exercise the transfer of equity option effectively, if required.
• The decision to convert the whole or part of the loan into equity shares should be well documented and approved by the majority of the JLF members.
• On effecting change in ownership under the Strategic Debt Restructuring Scheme, the lenders would collectively become the majority shareholder by conversion of their dues from the borrower into equity.
• Hence, post the conversion, all lenders under the JLF will collectively hold 51% or more of the equity shares issued by the company.
• All banks will include the covenants to exercise the Strategic Debt Restructuring Scheme in all loan agreements, including restructuring, supported by necessary approvals/authorizations.

The conversion can be done at a fair value to be determined according to the RBI Guidelines, but not below the face value.
This SDR scheme has given so many benefits to banks like continuation of existing asset classification of the account for a period of 18 months from the reference date, exemption of acquisition of shares from regulatory ceilings, exemption from investment in para-banking activities and intra group exposure etc. However, it's believed that there is a lack of clarity about its legal foundations. A key problem of the present environment is the presence of multiple frameworks such as DRT, CDR, JLF, etc. This creates forum shopping and increases delays. The bankruptcy process has become drawn out and involves battling it out through many steps. RBI's Scheme' adds one more layer of complexity into a complex system. The Code needs to be a clean and modern replacement for these multiple procedures.

Monali Mishra