1 May, 2016
Revisions to the Guidelines on Revitalizing Stressed Assets
RBI has, pursuant to a circular dated February 25, 2016, issued certain modifications and clarifications regarding guidelines previously issued by it for revitalising stressed assets including, inter alia, those in relation to the strategic debt restructuring (‘SDR’) mechanism and the scheme on flexible structuring of long term project loans to Infrastructure and Core Industries (‘5-25 Scheme’).
The impact of the key modifications and changes are summarised as follows:
- the current management of the borrower cannot be allowed to continue without representatives of banks on the board of the company and without supervision by an entity/person appointed by the banks. This creates an opportunity for firms/ individuals with experience in the relevant industries to step-in and assist in managing companies that have undergone an SDR, until ownership is transferred to
- the new promoters;
- banks needed to divest a minimum of 51% of an SDR company in order to be entitled to asset classification benefits under the SDR mechanism. This limit has been reduced to 26%;
- timelines prescribed for various activities related to the acquisition of shares under the SDR scheme have been relaxed and the new requirement is that banks must ensure that the conversion of debt into equity under the SDR mechanism occurs within 210 days from the review of achievement of milestones/critical conditions; and
- the decisions on the ‘corrective action plan’ (‘CAP’) by a joint lenders’ forum (‘JLF’) must now be approved by a minimum of 50% of creditors by number (previously 60%). However, by value, 75% of creditors must still approve the CAP.
The key changes to the prudential guidelines on restructuring of advances include:
- while borrowers involved in fraud/malfeasance were ineligible for restructuring under the erstwhile regulations, restructuring of accounts of such borrowers has now been permitted and asset classification benefits for such accounts have been made available, provided that the existing promoters have been replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management; and
- certain additional general conditions have been introduced that will apply to restructuring of advances, which include, inter alia, a 90 day time limit for implementation of all restructuring packages, corporate debt restructuring, JLF, consortium and multiple banking arrangements and 120 days for all other restructuring packages, and a stipulation that additional funds will be infused into the borrower by promoters to the extent of at least 20% of banks’ sacrifice or 2% of the restructured debt, whichever is higher.
RBI has also clarified that the 5-25 Scheme provided under the circulars dated July 15, 2014 and December 15, 2014 will be applicable to external commercial borrowings, subject to regulations issued under the Foreign Exchange Management Act, 1999.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
