The Reserve Bank of India ("RBI") has issued a new Scheme for Sustainable Structuring of Stressed Assets ("S4A Scheme") for the resolution of large stressed accounts in addition to the existing Strategic Debt Restructuring Scheme issued last year. The S4A Scheme contemplates determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and conversion of remaining debt in equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around. The salient features of the S4A Scheme are set out below.
A borrower account which meets all of the following conditions will be eligible to be structured under the S4A Scheme:
(i) project must have had commenced commercial operations;
(ii) the aggregate exposure (including accrued interest) of all institutional lenders should be more than Rs. 500 Crore; and
(iii) the borrower should be able to service at least 50% of the outstanding debt ("Sustainable Debt").
The amount and sustainability of the Sustainable Debt shall be decided through an independent techno-economic viability ("TEV") study.
Management: The resolution plan is required to be agreed upon by minimum of 75% of lenders by value and 50% of lenders by number. It can provide for any of the following for post-resolution ownership of the borrower:
(i) current promoter continues to have controlling shareholding; or
(ii) current promoter is replaced with a new promoter through conversion of part of the debt into equity through SDR or otherwise; or
(iii) lenders acquires majority shareholding through conversion and either allows current management to continue or hand over the management to a third party agency under operate and manage contract.
Restructuring of Debt: The outstanding debt will be bifurcated into Part A Debt and Part B Debt. Part A Debt will consist of Sustainable Debt which can be serviced (both interest and principal) within the respective residual maturities of existing debt, from all sources, based on the cash flows available from the current as well as immediately prospective (not more than six months) level of operations. Part B Debt will consist of the remaining outstanding debt (total outstanding debt less Part A Debt).
Part A Debt will be serviced by the borrower as per the original terms and conditions. No moratorium or extension of repayment schedule or reduction in the interest rate for Part A Debt will be permissible. The entire Part B Debt will be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, lenders may, at their discretion, also convert a portion of Part B Debt into optionally convertible debentures. The equity instruments should be marked to market by the lenders at least on a weekly basis as per methodologies specified.
Contribution by existing Promoter: If the existing promoter continues to manage the borrower, the promoter will be required to share loss on proportionate basis by way of conversion of debt into equity /sale of some portion of promoter's equity to the lenders, at least in the same proportion as that of Part B Debt to the total outstanding debt to lenders. Further, the promoters' personal guarantee will be required for at least the amount of Part A Debt.
Sharing of Upside by the lenders: The upside for the lenders will be primarily through equity/quasi equity, if the borrowing entity turns around. The terms for exercise of option for the conversion of preference shares/debentures to equity shall be clearly spelt out.
Overseeing Committee - Under the S4A Scheme, IBA will constitute an overseeing committee ("OC") comprising of eminent persons, in consultation with RBI. The OC will function as an advisory body where each resolution plan will be submitted to it for its opinion and recommendations. Once the resolution plan prepared/presented by the lenders is ratified by the OC, it will be binding on all lenders.
Asset Classification and Provisioning
Change of Promoters: In case a change of promoter takes place under the resolution plan, the asset classification and provisioning requirement will be as per the SDR scheme or outside SDR scheme as applicable.
No change of Promoters: Where there is no change of promoters, the lenders will have to upfront make higher provisioning at 40% of the Part B Debt or 20% of the total outstanding debt, whichever is higher. The lenders may upgrade the account to standard category after one year of satisfactory performance of service of Part A Debt.
Any provisioning requirement on account of difference between the book value of Part B equity instruments and their fair value, shall be made within four quarters commencing with the quarter in which the resolution plan is actually implemented in the lender's books, such that the MTM provision held is not less than 25% of the required provision in the first quarter, not less than 50% in the second quarter and so on. For this purpose, the provision already held in the account can be reckoned.
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.