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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. www.newbusinessregistration.in
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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.
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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 wilful 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 wilful 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, wilful 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 wilful 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 wilful 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.
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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 restructuring 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.
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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.
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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 instalment 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.
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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.
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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