What is Corporate Debt Restructuring?

The term "CDR" (Corporate debt restructuring) can be defined as the reorganization of the outstanding obligations of a distressed company to restore its survival and liquidity. Generally, corporate debt restructuring is achieved by way of negotiation between the distressed company and its creditors (banks, financial institutions etc.), by reducing the outstanding debt of the company, and also by minimizing the rate of interest it pays while increasing the payback period to pay the obligation back. Sometimes, a company's outstanding debt may be waived by its creditors in exchange for equity shares in the company.

Based on the past experience in other countries like the Thailand, U.K., Korea etc. of putting in place institutional mechanism for corporate debt restructuring and need for such mechanism in the country, a system of Corporate Debt Restructuring was evolved in India, and the detailed guidelines of the same were issued.

Objectives of the Corporate Debt Restructuring Framework

The prime objective of the Corporate Debt Restructuring framework is to ensure transparent mechanism and timely restructuring of the corporate debts of viable corporates facing financial crisis. Particularly, the Corporate Debt Restructuring framework will endeavour at preserving viable corporates that are affected by certain factors (whether internal or external) and curtail the losses to the creditors and other stakeholders of the corporate through a coordinated and an orderly restructuring programme.

Structure:

Corporate Debt Restructuring  system will have a three-tier structure:

•      CDR Standing Forum and its Core Group
•      CDR Empowered Group
•      CDR Cell

Eligibility Criteria

      The scheme of corporate debt restructuring will not be applicable where the accounts involve only one bank or one financial institution. The corporate debt restructuring mechanism will cover only multiple banking accounts/consortium accounts/ syndication with an outstanding exposure of Rs.20 crore and above by banks and financial institutions.

·     The Category 1 corporate debt restructuring system will be applied only to accounts that are classified as ‘standard’ and ‘sub-standard’. There may be a situation where a small part of debt by a bank might be classified as doubtful. In such a situation, if the account has been classified as ‘standard’ or

     ‘substandard’ in the books of 90% of lenders (by value) at least, the account would be considered as standard or substandard, for the purpose of judging the account as eligible for CDR only, in the books of the remaining 10% of lenders.

·      There would be no need of the company/account being sick, being in default for a specified period, NPA before the reference to the debt restructuring system. However, cases of NPA which are potentially viable will get priority. This approach would provide the flexibility and also facilitate timely intervention for debt restructuring.

·       In no case, the corporate debt restructuring request of any corporate indulging in misfeasance, wilful default or fraud, even in a single bank, will be considered for debt restructuring under corporate debt restructuring system.

·      The accounts where the lenders have filed recovery suits against the corporate entity may be eligible for restructuring under the corporate debt restructuring system provided, at least 75% of the lenders (by value) has taken initiative to resolve the case under the CDR system. However, such restructuring under the CDR system would require that the account meets the basic criteria to become eligible under the corporate debt restructuring mechanism.

·         

     Only large BIFR cases would be eligible for restructuring under the corporate debt restructuring system if specifically recommended by the CDR Core Group. This means that small and medium BIFR cases would be eligible for restructuring under the CDR system. The Core Group shall reoffer only exceptional BIFR cases for consideration under the CDR system.

Conclusion:

CDR (Corporate Debt Restructuring) mechanism is a non-statutory and a voluntary mechanism under which banks and financial institutions come together for restructuring the debt of companies experiencing financial crisis due to certain internal or external factors. This restructuring is done to provide timely financial support to such companies. This is an essential step taken by the government for the healthy functioning of the Indian market and soars the economic growth by efficiently dealing with defaulters.