India: Sustainable Structuring Of Stressed Assets

INTRODUCTION:

The Reserve Bank of India ("RBI"), from time to time, had issued various Guidelines with the objective of stimulating the stressed assets in the economy. Such Guidelines provide framework for Strategic Debt Restructuring (SDR) Mechanism, revitalizing the distressed assets in the economy, restructuring of advances, flexible structuring of long term project loans etc. To provide further flexibility to deal with stressed assets in the Country, the RBI had introduced SDR Mechanism for the purpose of ensuring more stakes of promoters in reviving stressed accounts and providing banks an option to initiate change of ownership, in cases where borrower companies fail to meet the critical conditions and viability milestones in the loan account. The Guideline on SDR provides that banks should consider revival plan using SDR only in cases where change in ownership is likely to improve the economic value of the loan asset and the prospects of recovery of their dues. As a step forward to deal with stressed assets, recently, the RBI, had issued Guidelines on the Scheme for Sustainable Structuring of Stressed Assets on June 13, 2016 (hereinafter referred as "Scheme") in order to strengthen the lenders' ability to deal with stressed assets.1 The stressed assets comprise of Non Performing Assets (NPAs), restructured loans and written off assets.

The Scheme is one step forward to the SDR Mechanism as under this Scheme the existing promoter may be allowed to continue in the management even being a minority shareholder. Further under this Scheme, the lenders have an option to hold optionally convertible debentures in addition to equity or preference shares, which would not be available under SDR.

RBI had recently asked banks to clean up their balance sheets by March 2017 and make provision for those losses before the end of March 2016. A large part of the write-off, however, is technical and more of a balance sheet management issue. Allaying fears on the system-wide bad loan stress ailing the banking system, prevention is better than cure.2 This scheme would provide an optional framework for the resolution of large stressed accounts.

ELIGIBILITY CRITERIA FOR THE APPLICABILITY OF THE SCHEME:

In order for the Scheme to apply, the account has to necessarily meet all the following conditions3:

  1. The project has commenced commercial operations;
  2. The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than INR 500 crores (including Rupee loans, Foreign Currency loans/External Commercial Borrowings,);
  3. The debt should be sustainable and should not be less than 50 percent of current funded liabilities.

TEST OF SUSTAINABILITY FOR RESTRUCTURING UNDER THE SCHEME:

This is one of the eligibility conditions that in order to be eligible for restructuring under this Scheme, the debt should meet the test of sustainability. A debt will be said to be sustainable if on the basis of independent Techno-Economic Viability (TEV), the Joint Lenders Forum (JLF)/Consortium of lenders/bank have opinion that the current outstanding debt i.e. funded and non-funded owed to banks/institutional lenders can be served by the current cash flows of the company over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. Therefore, the valuation of cash flow is an important element in this Scheme.

BIFURCATION OF THE OUTSTANDING DEBT:

The Scheme provides 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. Accordingly, the JLF/consortium/bank on the basis of an independent TEV report, divide the current dues into Part A and Part B as per below:

Part A Part B
Under Part A, the level of debt (including new funds required to be sanctioned within next six months and non-funded credit facilities that will be crystallized within the next 6 months) is determined which may be serviced within the respective residual maturities of existing debt through the current cash flows of the company as well as expected cash flows from the prospective level of operations, within the next 6 (six) months.

The level of debt so determined as per above would be referred as Part A under this Scheme. However, for the purposes of this Scheme such Part A debt should not be lower than 50% of the current funded facilities of the company.
The difference between the aggregate current outstanding debt from all sources and Part A would be referred as Part B under this Scheme.

The debt under Part B would be converted into equity/ redeemable cumulative optionally convertible preference shares/ optionally convertible debentures.

All such instruments would be referred as Part B instrument for the purpose of this Scheme.

THE RESOLUTION PLAN

The Resolution Plan as per Scheme provides for restriction on grant of any fresh moratorium on interest or principal repayment for servicing of Part A debt. It also provides restriction on any extension of the repayment schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to this resolution.

In addition the resolution plan provides that Part B debt shall be converted into equity/redeemable cumulative optionally convertible preference shares and in case where the resolution plan does not involve change in the existing promoters such Part B debt may be converted into optionally convertible debentures.

Further, under the Scheme, the resolution plan may involve any one of 3 options with regard to the post-resolution ownership of the borrowing entity which are as following:

The current promoter of the borrower may continues to hold majority of the shares or controlling interest; The current promoter may be replaced with a new promoter either through conversion of a part of the debt into equity under SDR mechanism (which is thereafter sold to a new promoter) or in the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme); The majority of shareholding in the entity may be acquired by lenders through conversion of debt into equity either under SDR or otherwise and the lender may allow the current management to continue or hand over management to another agency/ professionals under an operate and manage contract.

It may be noted here that in case any malfeasance on the part of the promoters has been established through a forensic audit or otherwise, then this Scheme shall not be applicable if there is no change in promoter or the management is vested in such delinquent promoter. The resolution plan under this Scheme must be agreed by a minimum of 75% of lenders by value and 50% of lenders by number in the JLF/consortium/banks.

Further, the resolution plan shall be submitted by the JLF/consortium/bank to an Overseeing Committee (OC), an advisory body to be constituted by the Indian Banks Association, comprising of eminent experts, in consultation with RBI for purpose of review of the resolution plan prepared under this Scheme, its reasonableness and adherence to the provisions of this Scheme.

It is worth mentioning here that once the resolution plan prepared and presented by the lenders is ratified by the OC, it will be binding on all lenders. They will, however, have the option to exit as per the extant guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP).

CHALLENGES FOR THE IMPLEMENTATION OF THE SCHEME:

While the scheme will be applicable only to projects which have commenced commercial operations, the projects which have not been able to achieve commercial operations due to some issues would not get benefit under this Scheme.

Further, under this Scheme, the RBI requires that for a debt to be sustainable in nature, the Joint Lenders Forum (JLF)/Consortium of lenders/bank should conclude through independent TEV that debt of that principal value amongst the current funded/non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. Accordingly, to apply this Scheme, the borrower should have ability to repay atleast 50% of its funded liabilities.

CONCLUSION:

The RBI has introduced this Scheme with the objective of providing banks a greater flexibility to structure the stressed assets in the Indian economy. The ultimate purpose of this Scheme is to reduce the number of non-performing assets which is rising extensively.

It is expected that this move would allow banks to manage dreadful loans and clean up their books more efficiently and effectively. In order to make sure that such an exercise is carried out in a transparent and prudent manner, the Scheme also envisages that the resolution plan will be prepared by credible professional agencies. It would require a substantial write down of debt and/or making large provisions for the same.

However, such Scheme is also not free from flaw. The major concerns under this Scheme that may be considered are that of its applicability for completed projects only. That means the projects which are under construction are not eligible for this Scheme. Furthermore, the determination of sustainable debt is also a cumbersome exercise that needs to be evaluated under this Scheme as such determination of debt should be accurately ascertained. In addition to these, another major concern under this Scheme is valuation of cash flow to ascertain the level of sustainable debt. Notwithstanding such flaws or demerits, the Scheme is a well attempt to alleviate the situation of distress assets in the Country that should be welcomed by the banks as well as corporate in India. A large number of borrowers may be take benefit under this Scheme in order to restructure their stressed assets.

Footnotes

1. Press Release by RBI to introduce a 'Scheme for Sustainable Structuring of Stressed Assets' dated Jun 13, 2016. Available at: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=37210.

2. Asset quality problem more of a governance issue: RBI Deputy Governor S S Mundra. Available at: http://articles.economictimes.indiatimes.com/2016-02-12/news/70568833_1_governor-ss-mundra-gross-npas-private-banks.

3. RBI notification for Scheme for Sustainable Structuring of Stressed Assets, dated June 13, 2016. Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10446&Mode=0.

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