Is strategic restructuring of debt the answer for banks?

By Sawant Singh and Aditya Bhargava, Phoenix Legal
To reduce the stress on banks due to non-performing assets (NPAs), troubled accounts and burgeoning restructurings, the Reserve Bank of India (RBI) has introduced measures over the past 18 months. These include the framework for early detection of potentially stressed accounts before these turn into NPAs, the guidelines on constituting the joint lenders forum (JLF) and the mechanism for putting in place a “corrective action plan” (CAP) for stressed borrowers, and amendments to the guidelines on wilful defaulters.
Sawant Singh
Sawant Singh

The JLF-CAP framework encourages lenders to: (a) explore a transfer of equity from promoters to lenders to compensate lenders for their “sacrifice” (i.e. haircut); (b) ensure that promoters infuse more equity into the borrower; and (c) see that the promoters’ shareholding is transferred to a security trustee or an escrow agent until the borrower is “turned around”.

As a follow-up to the JLF-CAP framework, the RBI has now introduced the strategic debt restructuring scheme, with the overarching objective of implementing a change of ownership (of borrowers). It appears that the RBI has launched this scheme with the view that many borrowers cannot be “turned around” because of “operational/managerial inefficiencies despite substantial sacrifices made by the lending banks”.

The framework prescribes that any restructuring package must specify timelines within which “viability milestones” are to be achieved by the stressed borrower, failing which the JLF should initiate “suitable measures” for recovery. To provide lenders with “enhanced capability” to initiate change of ownership for borrowers that fail to achieve such milestones, the scheme mandates the JLF to include provisions in the agreement with the borrower for conversion of the restructured debt into equity, and also requires the JLF to obtain all appropriate authorizations for such conversion upfront at the time of restructuring.

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Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.

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