India: Sustainable Structuring Of Stressed Assets

Last Updated: 24 August 2016
Article by Shivam Hargunani

Most Read Contributor in India, September 2016


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.


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.


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.


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 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).


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.


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.


1. Press Release by RBI to introduce a 'Scheme for Sustainable Structuring of Stressed Assets' dated Jun 13, 2016. Available at:

2. Asset quality problem more of a governance issue: RBI Deputy Governor S S Mundra. Available at:

3. RBI notification for Scheme for Sustainable Structuring of Stressed Assets, dated June 13, 2016. Available at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.