The Reserve Bank of India ("RBI") has issued the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 ("New Framework") on June 07, 20191 in which the RBI has continued the core principles of its circular dated February 12, 2018 ("February 12 Circular") and has added provisions encouraging both informal and formal restructuring in India. The New Framework creates an enabling framework for restructuring and resolutions outside the Insolvency and Bankruptcy Code, 2016 ("IBC") as well as encourages use of IBC as a restructuring tool. It applies to banks, financial institutions as well as large non-banking financing companies ("NBFCs") (the February 12 Circular did not apply to NBFCs) and also requires asset reconstruction companies to adhere to the relevant resolution framework under the inter-creditor agreement (see below).
We have examined the key features of the New Framework and how it compares with the February 12 Circular and the IBC.
The definition of default is the same as under the February 12 Circular, i.e. default is on day one. However, the RBI has introduced a 30-day review period for the lenders to decide on the resolution strategy.
The timeline of 180 days after the review period is provided for implementation of the resolution plan. There is no long stop date by which the resolution plan should be implemented. However, additional provisioning norms will apply after 180 days. Interestingly, while the New Framework applies to NBFCs, the 'review period' is not triggered with a default to NBFCs.
The lenders are expected to sign an inter-creditor agreement which will provide for the ground rules for finalisation and implementation of the resolution plan. The decision taken by 75% of the lenders by value and 60% of the lenders by number binds all lenders. This addresses one of the key apprehensions to the February 12 Circular that 100% lenders consent was required for implementation of the resolution plan. The inter-creditor agreement is also expected to provide for protection for the dissenting creditors and creditors with differential security. The resolution plan must provide for liquidation value due to dissenting lenders (a concept which has been dispensed with in the IBC).
Lenders have been given flexibility on the type of resolution plan that they may propose. The resolution strategy can include regularisation of the accounts, sale of debt, change in ownership and restructuring. Credit rating requirements continue to apply for resolution plans.
Any change in ownership under the New Framework will have to comply with Section 29A of IBC. Additionally, it has also been stipulated that the new promoter should not be a person/ entity from the existing promoter group (including as defined under the SEBI regulations).
Focussing on reporting discipline, the New Framework requires the lenders to report defaulted loans of Rs. 50 million and above to the Central Repository of Information on Large Credits on monthly basis as opposed to quarterly basis earlier and also requires lenders to weekly report to the RBI instances of defaults by borrowers.
Another important change under the New Framework is to the provisioning regime. While the extant provisioning regime generally continues, delayed implementation of resolution plan attracts 20% additional provisioning after the 180 days-time period and another 15% after 365 days, which is applicable to all lenders of the borrower. The lenders are permitted to reverse the additional provisioning once the resolution fructifies. As a big push for the lenders to use the IBC as a resolution tool, the lenders are permitted to reverse their additional provisioning by half upon filing of the insolvency application under the IBC and the other half upon admission of such application. In addition, for IBC cases, the provisioning requirement freezes once a resolution plan has been filed for approval by the National Company Law Tribunal ("NCLT") for a period of 6 months from the filing of the plan with NCLT or 90 days from the approval of the plan by the NCLT, whichever is earlier.
Upgrading of accounts:
The New Framework allows upgradation of accounts if, during the monitoring period, there is no default. The monitoring period is set with reference to the date by which at least 10% of the principal debt and the interest capitalised is repaid. This is a concession from the previous provision which allowed an upgrade only if 20% of the outstanding principal was repaid. In addition, a new requirement of credit rating has been introduced for upgradation of accounts where exposure is more than Rs. 1 billion. If the account is not performing satisfactorily during the monitoring period, an additional provision of 15% has been stipulated.
Fresh Resolution Plan:
If during the period upto which 20% of the outstanding principal and interest capitalised is repaid the borrower is in default with any of the lenders, a fresh resolution plan will be required in addition to the additional provision of 15% at the end of review period. This is an additional requirement in the new framework.
As can be seen above, implementation and compliance of the resolution plan is important as otherwise the provisioning norms will apply resulting in additional provisioning.
Interaction with IBC:
In line with the reasoning in the Supreme Court judgement which struck down the February 12 Circular, there is no mandatory reference to IBC if no resolution plan has been agreed or implemented within the timeline. However, the RBI has reserved its right to give specific direction in respect of companies.
Further, the New Framework permits interim finance to be treated as standard debt. Also, similar to the February 12 Circular, additional finance to be provided under the resolution plan is also to be treated as standard debt. This will enable the existing lenders to fund resolutions which has not been possible hithertobefore due to asset classification norms.
Interface with SEBI Regulation:
Conversion of debt into equity shares that is done in accordance with the New Framework will be exempt from the applicability of preferential issue provisions under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and from open offer requirements under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, provided that the issue of shares complies with pricing guidelines under the New Regulations.
Overall, the continued focus of the RBI on time-bound resolution of stressed assets with full flexibility to commercial banks to tailor-make the resolution strategy is welcome. The ICA amongst the banks would be expected to provide the right framework for enabling resolution and by providing incentives and disincentives, the New Framework also strikes a right balance in between consensual and in-court restructuring under the IBC.
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