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CDR: Gearing Up For Success Or Failure

Published on Thu, Dec 12,2013 | 16:44, Updated at Thu, Dec 12 at 16:44Source : 

By: Nirav K Pujara, Senior Manager, Deloitte Haskins & Sells

The Corporate Debt Restructuring (“CDR”) mechanism approved by Reserve Bank of India as early in the year 2001 has seen huge increase in activity in the last two to three years. Under the CDR mechanism, the lenders form a majority of 75% by value and restructure the terms of the debt which is binding on the remaining 25% of the creditors. The number of corporates and the overall debt exposure restructured under CDR has significantly increased. As on June 2013, a total of 415 cases having debt exposure amounting to Rs 2.5 lakh crores have been admitted under CDR. Also, 42 cases amounting to Rs 48K crores are under finalization of restructuring packages(1). With the current economic scenario in India along with the volatility seen in Indian rupee, this number is only expected to further increase in the next two years.

There has been a fair amount of discussion on whether CDR mechanism is a success or whether the same is being exploited either by bankers to delay the inevitable or by promoters who are willful defaulters. If planned, monitored and executed well, CDR can definitely help bankers turn around corporates. However, poorly executed CDR cases can also add to the woes of already troubled corporate and increase the debt exposure of the lenders. Some of the factors which are critical for CDR success are listed below:

Understanding Reasons For The Financial Crisis

Before admission of case in CDR, it is important for the lenders to understand the reason for the current financial crisis at the corporate. Is it due to industry dynamics which has resulted in the slowdown or some investment which has not yielded desired results or there has been diversion of funds to other business needs. Most of the times, the external factors are visible and can be identified; however for understanding the internal factors it is important  for lenders to first undertake a review to identify facts before taking any  decision on admitting a case under CDR. In this respect, Techno Economic Viability (“TEV”) reports can help assess the company’s performance vis-à-vis industry peers and also showcase projected financials for future years while investigative reviews can help identify whether there has been any diversion of funds leading to this financial crisis.

Promoter Contribution

As per CDR master circular 2012, promoter’s contribution has been raised to 20 % (from the earlier 15%) of the sacrifice made by the lenders or 2% of the restructured loan, whichever is higher.  Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of de-rating of equity, conversion of unsecured loan brought by the promoter into equity and interest free loans.

That said, what is actually required for revival of business is inflow of real cash into the system. Promoters can demonstrate their commitment in reviving the business by timely influx of contribution in to the system.

Timely Execution

When a corporate is reeling under financial debt, there can be various challenges faced such as nonpayment of salaries / wages / vendor dues which adversely affect revenue generating operations. Accordingly, decisions (for disbursement of money / LCs) to be taken in forums such as Joint Lenders Meet (“JLM”) or Monitoring Committee (“MC”) have to be time conscious and the same should be implemented by lenders in timely manner. On many occasions delays in execution of such decisions leads to paralysis in operations of the company which only aggravates the problem as far as the borrower is concerned.

Disposal Of Assets

One mode of generating revenue and reducing the debt burden is to identify the non-core assets owned by the company and disposing them to raise funds. Money generated from disposal of these assets can help either in debt servicing of financing working capital needs for the borrower. To help alleviate this situation, Monitoring Institution (“MI”) should ensure that the assets are adequately valued and should assist in lining up prospective buyers for the assets.

Regular Monitoring

Continuous and ongoing monitoring is one of the pre requisites for CDR mechanism. One of the requirements of CDR, is appointment of a concurrent auditor for monitoring of borrower operations. The concurrent auditor and MI have to work closely together to maintain oversight on borrower operations. Some of the important aspects to be reviewed include monitoring of cash flows of the company in order to ensure that the Trust & Retention Accounts (“TRA”) mechanism including water fall mechanism as stipulated in Master Restructuring Agreement (“MRA”) is adhered to.

While CDR is mainly a reactive measure adopted by the lenders, the ideal requirement for lenders is to have stringent credit assessment norms including continuous monitoring during the business as usual stage.  Any borrower getting admitted under CDR goes through standard symptoms for a certain period of time indicating that the business including cash flow is suffering. Bankers have to keep a watch on these symptoms (delay in payment of salaries, loss of key personnel, etc) and take necessary proactive action in order to ensure that the credit exposure is kept at a minimal.

For now CDR is here to stay and the key measure for success for bankers is to ensure timely execution and close monitoring on borrower operations. Promoters have to demonstrate their commitment in getting the business out of debt crisis by getting in promoter contribution (in cash) and showing complete transparency in their interactions with the lenders.

1)Source: Figures are as per Corporate Debt Restructuring (CDR) Cell progress report as on June 30, 2013


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