Summary of Corporate Debt Restructuring CDR Mechanism

Background of Corporate Debt Restructuring (CDR) Mechanism The Reserve Bank of India had undertaken a review of the working of the Corporate Debt Restructuring (CDR) Mechanism in the month of August, 2004 and a special group was constituted in September, 2004 by the Deputy Governor, RBI as chairperson to review and suggest changes or improvements, if any, in the CDR mechanism. Based on the recommendations of special groups, Corporate Debt Restructuring (CDR) guidelines have been further revised. The changes to existing guidelines are as following topics.

Corporate Debt Restructuring (CDR) Standing Forum The RBI would not be a member of the CDR standing Forum and Core Group. Its role will be confined to providing broad guidelines. The Forum, while laying down the policies and guidelines, should also set out the critical parameters for restructuring (i.e., maximum period for a unit to became viable under the restructuring package, minimum level of promoter’s sacrifice, etc.) to be followed by the Corporate Debt Restructuring (CDR) empowered group and Corporate Debt Restructuring (CDR) cell for debt restructuring. Eligibility Criteria The CDR Mechanism will cover only multiple banking accounts/syndication/consortium accounts with outstanding exposure of 10 crore rupees and above by banks and institutions. In terms of the extant institutions, in no case, requests of any corporate indulging in willful default, fraud or misfeasance even in a single bank will be considered for reconstructing under the CDR Mechanism. Modifications introduced recently in the system laid down for the identification of the willful defaulters has made it more transparent and has provided an opportunity to the borrower before the final classification is made. As a general principle therefore, willful defaulters should not be entertained under the CDR Mechanism. However, the deserving cases, the Core Group may review the reason for classification of the borrower as willful defaulters and satisfy itself. Such exceptional cases may be admitted for restructuring only with the approval of the Core Group. The crore group may evolve policies and safeguards for dealing with the cases of willful default. The accounts where recovery suits have been filed by the lenders against the company, may be eligible for consideration under the Corporate Debt Restructuring (CDR) Mechanism provided, the initiative to resolve the case under the CDR Mechanism is taken by at least 75% of the lenders (by value)and 60% of lenders. Legal Basis of Corporate Debt Restructuring (CDR) Mechanism In order to ensure discipline in the CDR Mechanism, members of CDR may jointly or severally decide that those banks that have not joined the mechanism as members would not be eligible for future consortium/syndication arrangements for lending. For the purpose, a collection action clause may be incorporated in the loan agreements involving multiple lenders whereby all lenders agree to abide by the majority decision for restructring of an account in case of need. If 75% percent of creditors by the value and 60% of the creditors in number, approve a restructuring package of an existing debt (i.e., debt outstanding) under CDR Mechanism , it shall be binding on the remaining creditors of the company registration. Stand-Still Clause During pendency of the case with the Corporate Debt Restructuring (CDR) Mechanism, the usual assert classification norms continue to apply and the process of reclassification of a n assert does not stop merely because the case is referred to the CDR Cell. If restructuring under the CDR mechanism is approved and the approved package is implemented within three months from the date of approval by the Empowered Group, the assert classification status to be restore to the position, which existed when the reference to the Cell was made. Consequently, any additional provisions made by banks towards deterioration in the assert classification status during the pendency of the case with the Corporate Debt Restructuring (CDR) Mechanism may be reversed. If an approved package remains unimplemented even three months after the date of approval by the Empowered Group of the company registration, it would indicate that the success of the package is uncertain. Therefore, the assert classification status of the account should not be restored to the position as on the date of reference to the CDR cell. This will ensure that banks which delay implementation of the package will not be allowed to enjoy the regulatory concessions. Additional finance for Corporate Debt Restructuring (CDR) Mechanism Additional finance, if any, is to be provided by the all lenders irrespective of whether they are working capital or term lenders on basis. The additional finance may be treated as standard assert up to a period of one year after the first interest or the initial payment whichever is earlier falls due under the approved restructuring package. The income in this period may be recognized only on cash basis. If restructured assert does not qualify for up gradation at the end of the above period, additional finance shall be placed in the same assert classification category as the restructured debt. In case of any internal person, any creditor( outside the minimum 75 and 60 percent) does not wish to commit additional financing, that creditor will have the option to either (a) arrange for his share of additional financing to be provided by a new or existing creditors , or (b) agree to deferment of the first year’s interest due to him after the Corporate Debt Restructuring (CDR) package becomes effective in company registration. The first year deferred interest as mentioned above, without compounding, will be payable along with the last installment of the principal due to the creditor. Exit option for Corporate Debt Restructuring (CDR) Mechanism As mentioned in paragraphs above, the proposal for restructuring package should provide for option to a particular lender or lenders (outside the minimum 70 and 60 percent who have agreed for restructuring) who for any internal reason, does/do not fully abide by the Corporate Debt Restructuring (CDR) empowered group’s decision on restructuring. The lenders who wish to exit from the package would have the option to sell their existing share to either the existing lenders or fresh lenders at an appropriate price, which would be decided mutually between the existing lender and taking over lender of the company registration. The new lenders shall rank on par with the existing lenders for repayment and servicing of the dues, since they have taken over the existing dues to the existing lenders. In addition, the ‘exit option’ will also be available to all other lenders within the minimum 75 and 60 percent provided the purchaser agrees to abide by the restructuring package approved by the Empowered Group. In order to bring more flexibility in the exit option. One time settlement can also be considered, whether necessary, as a part of the restructuring package. Conversion option Equity acquired by the conversion of debt/overdue interest under the Corporate Debt Restructuring (CDR) Mechanism is allowed to be taken up without seeking prior approval from RBI even if the capital market ceiling is breached, subject to reporting such holdings to RBI every month along with the regular statement. However, banks will have to comply with the provisions of section 19(2) of the BR Act. Acquisition of non-SLR securities by way of conversion of debt are exempted from the guidelines on Non – SLR securities subject to periodical reporting to RBI. LENDERS RIGHT For the second category of Corporate Debt Restructuring (CDR), where the accounts have been classified as ‘doubtful’ in the books of lenders, a minimum of 75%(by value) and 60% of the lenders in number should satisfy themselves of the viability of the account and consent for such restructuring. All Corporate Debt Restructuring (CDR) approved packages must incorporate lender’s rights to accelerate repayment and borrower’s right to repay. The right of recompense should be based on certain performance criteria to be decided by the CDR standing form. Prudential and Accounting issues Accounts restructuring under the Corporate Debt Restructuring CDR system, including accounts classified as ‘doubtful’ under category 2 Corporate Debt Restructuring (CDR), would be eligible for regulatory concession in assert classification and provisioning on writing off/providing for economic sacrifice in terms of the circular dated march 30.2001, only if- he restructuring under Corporate Debt Restructuring (CDR) is done for the first time of the Company Registration. The unit becomes viable in 7 years and the repayment period for the restructured debts does not exceed 10 years. Promoters sacrifice and additional funds brought by them should be a minimum of 15% of lenders sacrifice, and personal guarantee is offered by the promoter except when the unit is affected by the external factors pertaining to the economy and industry. Treatment of Standard Accounts restructured under CDR Prudential and Accounting issues Accounts restructuring under the CDR system, including accounts classified as ‘doubtful’ under category 2 Corporate Debt Restructuring (CDR), would be eligible for regulatory concession in assert classification and provisioning on writing off/providing for economic sacrifice in terms of the circular dated march 30.2001, only if-

he restructuring under Corporate Debt Restructuring (CDR) is done for the first time of the Company Registration. The unit becomes viable in 7 years and the repayment period for the restructured debts does not exceed 10 years. Promoters sacrifice and additional funds brought by them should be a minimum of 15% of lenders sacrifice, and personal guarantee is offered by the promoter except when the unit is affected by the external factors pertaining to the economy and industry. A rescheduling of interest element either before commencement of commercial protection or after commencement of commercial protection but before the assert has been classified as sub-standard provided conditions 1 to 5 are complied with would not cause an assert to be downgraded to sub-standard category on writing off/providing for the amount of sacrifice, if any, in the element of interest measured in present value terms. For this purpose, the sacrifice might be calculated as the variance between the present value of the future interest of the company Registration process. Treatment of sub-standard/doubtful accounts restructured under Corporate Debt Restructuring (CDR) A rescheduling of interest would render a sub-standard/doubtful assert eligible to be continued to be classified in sub-standard/doubtful category for the specified period provided the conditions 1 to 5 are complied with and the amount of sacrifice, if any, in the element of interest, measured in person value terms computed as per the methodology described in the company registration process. Banks/FIs may recalculate the amount of sacrifice at each balance sheet date so as to capture the changes in the fair value on the account of changes in BPLR, term premium and the credit category of the borrower and the amount of excess provision, if any, may be reserved. Economic sacrifice must necessarily be provided for by debit to the Profit & Loss account. In the event of ZERO coupon bond is taken against the sacrifice, it should be valued at Rs.1 till the maturity of the bond. In case of restructured assert is subjected to restructuring on a subsequent occasion when the restructured assert is standard assert, it should be classified as sub-standard. The restructured may be allowed to be upgraded to standard assert category after one year from the date of first payment of interest or repayment of principle, whichever falls dues first in terms of the restructuring package, subject to satisfactory performance during this period. If a standard assert is taken upon for restructuring before commencement of production and the restructuring package provides a longer period of moratorium on interest payments beyond the expected date of commercial production/Date of commercial protection the original moratorium period, the assert can no more be treated as standard assert. It may, therefore, be classified as sub-standard. The same regulatory treatment will apply if a standard assert is taken up for restructuring after commencement of production and the restructuring package provides for a longer period of more be treated as standard assert. Where overdue interest is funded or outstanding principal and interest components are converted into equity, debentures, zero coupon bonds or other instruments and income is recognized in consequence. Equity, debentures and other financial instruments acquired by the way of conversion of outstanding principal and interest should be classified and valued in accordance with the extant instructions except to the extent that a) equity may be valued as per the market value, if quoted b) in cases where equity is not quoted, valuation may be at break-up value in respect of standard asserts and c) in respect of sub-standard/doubtful asserts, equity may be initially valued at Rs.1 and the Break-up value after restoration/up gradation to standard category. If the conversion of interest into equity, which is quoted, interest income can be recognized after the account is upgraded to the standard category at market value of equity, on the date of such up graduation, not exceeding the amount of interest converted into equity. In case of conversion of principal and /or interest into debentures, zero coupon bonds, etc., such instruments should be treated as NPA in the same assert classification category as the loan if the loan’s classification is sub-standard or doubtful on implementation of the restructuring package and provision should be made as per the norms. Consequently, income should be recognized on these instruments only on realization basis. The income in respect of unrealized interest which is converted into debentures or any fixed maturity instruments, would be recognized only on redemption of such instruments. Disclosure Banks/FIs should also disclose in their published annual Balance sheets, under ” Notes on Accounts”, the following requirements in accordance with the corporate debt restructuring undertaken during the year: Total number of accounts , total amount of loan asserts and the amount of sacrifice in the restructuring cases under corporate debt restructuring (CDR). [(a) = (b) + (c) + (d)] The number, amount and sacrifice in standard asserts subject to Corporate debt restructuring (CDR). The number, amount and sacrifice in sub-standard asserts subjected to Corporate debt restructuring (CDR).