The Reserve Bank of India has introduced a revised framework in relation to the resolution of stressed assets withdrawing all extant instructions in this regard, such as SDR, S4A and CDR.
Background
The RBI has by its notification dated 12 February 2018 (Notification) released a revised restructuring framework (Framework) for resolving stressed assets and has withdrawn, with immediate effect, all its existing instructions in relation to the resolution of stressed assets including the 'Corporate Debt Restructuring' scheme', 'Strategic Debt Restructuring' scheme and the 'Scheme for Sustainable Structuring of Stressed Assets'. The Framework currently applies to scheduled commercial banks (excluding regional rural banks) and All-India Financial Institutions being the Export-Import Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India.
Key features
1. If a borrower commits a payment default, all lenders, either individually or jointly, are required to initiate steps to cure the default by implementation of a resolution plan (Resolution Plan). A Resolution Plan may involve any action/plan/reorganisation, including:
(a) payment of all overdues by the borrower;
(b) sale of exposures to other entities/investors;
(c) change in ownership of the borrower; or
(d) restructuring (including grant of any concessions to the borrower such as modification of terms, alteration of repayment period/amount/interest rate, sanction of additional credit facilities, enhancement of limits etc.).
2. The Framework provides that even if the borrower has committed a default in relation to only one lender, all lenders must initiate steps to cure the default/take up Resolution Plan(s).
3. A Resolution Plan is deemed to be implemented only if:
(a) the borrower is no longer in default; and
(b) if the Resolution Plan envisages restructuring, all related documentation (including security creation and perfection) is completed, and any change in capital structure/change in the terms of the existing loans is reflected in the books of the borrower and the lenders.
4. For borrower accounts with an aggregate exposure of INR 20 billion and above which are in default, a Resolution Plan has to be implemented by all the lenders within 180 days from 1 March 2018 (which has been fixed as the reference date under the Framework). However, if a default occurs after the reference date, then a resolution plan must be implemented within 180 days of the first such default. If a Resolution Plan is not implemented within this timeline, the lenders are required to file insolvency applications under the Insolvency and Bankruptcy Code, 2016 (IBC) (within a period of 15 days thereafter) in respect of such borrower.
5. A specified period has been stipulated in the Framework which commences from the implementation of the Resolution Plan and continues till the payment of at least 20% of the outstanding principal debt and interest capitalisation. Such period cannot be less than 1 year from the commencement of the first payment of principal or interest (whichever is later) on the facility with the longest moratorium under the Resolution Plan. If a default occurs at any time (in respect of borrower accounts with an aggregate exposure of INR 20 billion and above) during the specified period, the lenders would have to file applications under the IBC.
6. All existing instructions on resolution of stressed assets have been withdrawn with immediate effect. The joint lenders' forum (JLF) mechanism is also discontinued. Resolution Plans need to be implemented by all the lenders and there is no provision for a majority decision of lenders being binding on the other lenders, as was previously the case in the JLF mechanism. The Framework does not envisage a formal forum for the lenders to come together to take decisions.
7. All accounts, including accounts where any of the earlier schemes have been invoked but not implemented, will now be governed by the Framework. It therefore appears that for accounts where a scheme has already been implemented, the Framework would not apply and the terms of the scheme would continue to apply. However, if a default occurs at any time in the future in respect of such previously implemented schemes, the requirements of the Framework may apply.
8. Upon a restructuring being implemented, assets classified as "standard" would be immediately downgraded as non-performing assets. If the restructuring is of assets classified as non-performing, the same asset classification will continue post restructuring. An upgrade is possible only once all the outstanding loans demonstrate satisfactory performance (i.e. no default in payment at any time) during the specified period. Additionally, for accounts with aggregate exposure of INR 1 billion and above, an investment grade credit rating will be required to qualify for an upgrade.
9. In case of change in ownership, loans may be upgraded to "standard", subject to conditions specified in the Framework such as, banks shall conduct necessary due diligence and clearly establish that the acquirer is not disqualified under Section 29A of the IBC.
10. The Framework also provides for the issue price of equity and the price at which sale of equity instruments acquired by banks is to be carried out to a new promoter, for the purpose of exemptions provided by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for restructurings carried out as per regulations issued by the RBI.
11. The Framework is triggered on the date of payment default and does not provide for any grace periods.
Takeaways
1. The Framework does not clarify whether it applies to loans given by offshore branches of Indian banks, to offshore borrowers with parent in India, as was the case in the previous regime. It also does not expressly clarify the status of accounts where an existing scheme has already been implemented, though it appears that the Framework may not apply in such cases unless a default is subsisting/occurs post such implementation.
2. The definition of "lenders" as per the Framework is inclusive: "Lenders under these guidelines would generally include all scheduled commercial banks (excluding RRBs) and All-India Financial Institutions, unless specified otherwise. " Clarity is required on whether the reference to lenders (and on all lenders implementing Resolution Plan(s)) is only restricted to scheduled banks and All-India Financial Institutions, or if it also applies to other lenders to the borrower, including non-banking financial companies, foreign lenders, debenture holders etc.
3. The Framework seems to restrict the remedies practically available to lenders (where aggregate exposure of the borrower exceeds INR 20 billion), as they would have to compulsorily file applications under the IBC at the end of the stipulated period. This may not leave scope for considering other recovery measures available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
A move to speed up resolution of stressed assets
The Notification has replaced the erstwhile stressed asset schemes with a simplified generic framework, which is expected to contribute to the early recognition and resolution of stressed accounts. It appears that the RBI is reposing faith in the IBC to resolve all stressed assets. While the Framework is a step towards resolution of stressed assets in a time bound manner, it remains to be seen whether the Framework can be practically implemented within the timelines prescribed by the RBI.
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