Cdr Final Project

Project Report

on

‘Corporate Debt Restructuring’

Submitted By:

Haresh Patel, Roll No.2234

Corporate Debt Restructuring

ABSTRACT

Corporate Debt Restructuring (CDR) has been used by the companies while facing ugly finances and the

bankers willing to consider a flexible mechanism such as CDR, as the banks /financial institutions have to

reduce their Non Performing Assets (NPA) .Based on the recommendations of the Working Group on

CDR Reserve Bank of India (RBI) has appealed to the corporate to be exercising caution and financial

discipline and the bankers to be prudent and vigilant while granting the CDR to the borrowing companies

based on their prevailing financial situation. The research paper is structured as follows: Firstly, it

attempts to study the concept of CDR. The Second part attempts to understand the mechnisum of CDR in

India. The Third would present statistics on CDR cases. NPA and analysis. The Third part would

examine the impact of CDR to the banking system and the economy and the emerging issues and

perspectives would be posed in the Conclusion.

Acknowledgement

It is my privilege to extend my heartiest thanks to all those who have directly or indirectly

contributed significantly to complete this project with utmost accurate, validity and authenticity.

We would like to express my earnest gratitude to Prof. Vinay Dutta, Sr. Professor & Area

Chairperson, FORE School of Management, for the stupendous guidance and support that he

provided to us during the execution of the project.

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We would also like to thank Mr. Narendar Thakran for giving us this golden opportunity to work

on CDR in Punjab National Bank. His role in providing a vivid insight into the topic goes

beyond the realms of any text book.

Thanking all

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Table of Contents

Chapter 1 Introduction 5

Characteristics of CDR 6

Objective 6

Chapter 2 Sources of Data 6

Chapter 3 Method of Research 6

Chapter 4 Literature Review 7

Chapter 5 Understanding CDR 10

Recovery Mechanism 10

Debt Recovery Process 10

Normal Recovery Procedure 10

Difficult recovery process 11

Modes of Recovery 12

Importance of CDR 13

Present Status of CDR cases 14

Prudential and Accounting Issues 15

Chapter 6 CDR Mechanism in India 16

Objective 16

Structure 16

CDR Standing Forum 16

CDR Empowered Group 17

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Eligibility Criterion 18

Chapter 7 Financial Viability Parameters 20

Return on Capital Employed 20

Debt Service Coverage Ratio 20

Gap between Internal Rate of Return and Cost of Capital 21

Extent of Sacrifice 21

Other Financial Parameters 22

Break-Even Analysis 22

Gross Profit Margin 22

Loan Life Ratio 23

Chapter 8 Live Case Study 24

Major Problem Areas 24

Adverse Effect of reviewing accounting policy 24

Failure to raise funds through Right Issue 25

Effect of failure of company’s effort for a slump sale of COMAPNY X’s business 25

Global Recession and its effect on company’s business 26

Future Outlook for the Company 26

Marketing Viability 26

Demand and Supply Analysis 26

Future Market Demand and Supply 27

Term Lenders CDR 29

Working Capital Lenders (CDR) 29

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Non CDR Lenders 30

Restructuring Proposal 30

Restructurization of term loans 30

Restructuring of Working Capital 31

OCCPRS 32

WCTL 33

Funding of interest accruing from cut off date to 30.09.2011 by converting the same into Funded Interest

Term Loans (FITL) 33

Total FITL Calculation 34

Allocation of Drawing Power (DP) 34

Additional WC funding 35

Promoters Contribution 36

Financial Viability 37

Ratio analysis 38

Safeguards provided in the scheme 39

Chapter 9 : Learnings and Outcomes 41

Chapter 10 References 42

Chapter 11 Annexures 43

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Introduction

In spite of their best efforts and intentions, sometimes corporates find themselves in financial

difficulty because of factors beyond their control and also due to certain internal reasons. For the

revival of the corporate as well as for the safety of the money lent by the banks and FIs, timely

support through restructuring in genuine cases is called for. However, delay in agreement

amongst different lending institutions often comes in the way of such endeavors.

Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place

institutional mechanism for restructuring of corporate debt and need for a similar mechanism in

India, a Corporate Debt Restructuring System was evolved in 2001.

Corporate Debt Restructuring (CDR) mechanism is a voluntary non statutory mechanism under

which financial institutions and banks come together to restructure the debt of companies facing

financial difficulties due to internal or external factors, in order to provide timely support to such

companies. The intention behind the mechanism is to revive such companies and also safeguard

the interests of the lending institutions and other stakeholders. The CDR mechanism is available

to companies who enjoy credit facilities from more than one lending institution. The mechanism

allows such institutions, to restructure the debt in a speedy and transparent manner for the benefit

of all.

While it has proved to be fruitful in many cases, still there is a lot of scope for improvement.

Various issues arise such as foreign lender’s reluctance to be a part of the CDR process along

with Indian banks, because they feel that the process is more favourable to Indian lenders and

could be misused by certain entities. The analysis shows that many restructured cases turn into

bad assets over a period of time. A thrust area which needs a further look-in is the post

restructuring phase which demands heavy monitoring.

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Objective

The objectives of the study are:

To understand the concept of Corporate Debt Restructuring(CDR)

To understand the process involved in CDR.

To gain an insight into the various issues involved while considering an organization for

the CDR.

To understand the various steps taking by the banks and other financial institutions

involved while doing CDR of an organization.

Pros and Cons of the CDR.

Research methodology

The study focuses on extensive study of Secondary data collected from various books, National

& international Journals, government reports, publications from various websites which focused

on various aspects of Corporate Debt Restructuring.

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What is Corporate Debt Restructuring?

‘Corporate Debt Restructuring (CDR) is restructuring of outstanding debts of company when it

find it is difficult to repay the same’.

‘Any change in the terms and conditions of the loan or credit, especially in respect of its

servicing is called restructuring of debt.’

‘Corporate Debt Restructuring (CDR) or simply restructuring of loans and advances, with all its

pros and cons, is an effective financial tool, especially during the times of crisis are in

smoothening the adverse effects of economic downturns on the borrowers of credit as well as

their lenders.’

Characteristics of Corporate Debt Restructuring

Increasing the tenure of moratorium of Loan installments.

Increasing the tenure of loan.

Reducing the rate of interest.

Converting debt in to equity.

Converting un-serviced interest portion of interest in to term loan.

Funding of the interest of both term Loans and Working Capital through FITL.

Additional funding if required

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Approaches to Corporate Debt Restructuring

Key objectives of comprehensive corporate debt restructuring strategies following a financial

crisis have been to support an economy-wide recovery through: (i) facilitating the exit of

nonviable firms (i.e., firms without a reasonable prospect of achieving sustainable profitability);

and (ii) enabling the timely restructuring of debt and access to sufficient financing to sustain

viable firms.

Corporate debt restructuring can take many forms directed to the debt and capital structure of a

firm; it can include debt rescheduling, interest rate reductions, debt-for-equity swaps and debt

forgiveness. To be successful in securing the longer term viability of corporates, debt

restructuring will often be accompanied by operational restructuring addressing the structure and

efficiency of the firm’s business through closures and reorganization of productive capacity.

While measures in the debt restructuring phase would evolve, three broad categories of

approaches to corporate debt restructuring in the aftermath of a financial crisis can be identified,

distinguished by varying degrees of government involvement. The categories reflect the center of

gravity of the measures from case by case market solutions to across the board government-

determined solutions, or an intermediate approach between the two.

A case by case, market-based, approach has been used in which private sector debtors

and creditors are generally left to determine the nature, scope and terms of the burden

sharing on a case by case basis and principally relying on market solutions (e.g.,

Hungary and Poland in the 1990s, Korea, Malaysia, and Thailand in the late 1990s).

While this approach is essentially market-oriented, the government would still have an

important role through implementing legal reforms to encourage timely market-driven

restructuring. Furthermore, fiscal support (if any) in this approach would be on an

indirect basis through support of the financial sector (e.g., use of public funds to

recapitalize domestic banks that meet certain soundness requirements, and thereby

strengthen the capacity of those banks to absorb losses within debt restructuring).

An across the board approach involves direct government involvement that determines

the method and distribution of burden sharing among relevant parties. Under this 10


approach, the relevant solutions are generally applicable across the board to all economic

agents in the pre-specified category, regardless of individual factors. There are two

alternative characteristic features of this approach. The first is direct fiscal support to

corporates, which could range from a predetermined amount of support for specified

purposes (e.g., to protect against foreign exchange rate risk), to tax and other fiscal-

related incentives for firms that engage in restructuring. The second is a legislatively

mandated absorption of losses by creditors; such a strategy should be avoided given the

risks of legal challenge and undermining the credit culture of a country. (Mexico and

Chile government had adopted this approach in 1982).

An intermediate approach has been applied that relies on case by case negotiations,

supported by government financial incentives, bolstered by legal and regulatory reforms,

and establishment of public entities to galvanize debt restructuring.

Without exception, all country experiences of wide scale corporate debt restructuring have been

mixed and have involved lengthy and difficult processes. While any approach needs to be

tailored to the circumstances of a country—including macroeconomic conditions, composition of

debt and legal/institutional framework—the experience with corporate debt restructurings in the

aftermath of systemic crises indicates that a properly designed intermediate strategy would

generally be expected to make the best use of limited fiscal resources and avoid shifting the

burden of restructuring unsustainably to creditors. A good CDR mechanism must discourage

strategic behavior by creditors and debtors and should not discriminate between foreign and

domestic creditors.

London Approach:

Parallel to reform of the legal framework, some degree of government involvement in supporting

guidelines for out-of-court restructurings would facilitate wide scale debt restructurings. There is

substantial international experience from which to draw.

The so-called London Approach has influenced the evolution of government sponsored

guidelines for multicreditor out-of-court debt restructurings. Under the leadership of the Bank of

England, UK banks developed the London Approach as a set of informal guidelines on a

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collective process for voluntary workouts to restructure debts of corporates in distress, while

maximizing their value as going concerns in 1970. Subsequently, countries facing wide scale

corporate debt distress in the late 1990’s turned to the London Approach as a basis to develop

their own guidelines to encourage out-of-court corporate debt workouts. For instance, in

Indonesia, Korea, Malaysia, Thailand and also India, the London Approach was modified

through enhancing the centralized role of government agencies to provide incentives for

restructurings. Furthermore, in these country cases, government enhancements were added to

establish a more structured framework to support restructurings.

Concept on CDR and relevance to insolvency

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The concept of restructuring holds relevance in the context of insolvency when the company is in

financial distress as restructuring of a company is done when the company essentially has a

viable business but owing to external factors, it has a bad balance sheet and therefore incurs

losses. These external factors may be factors such as government policy, change of interest rates,

pressure on the domestic currency, among other factors. These situations are beyond the

company’s control and when a company tends to have a bad balance sheet owing to such

unfavorable conditions, it has to be given another opportunity to manage its assets and liabilities

and therefore here the role of debt restructuring is important.

The basic objective of debt restructuring is to ensure that the company’s business stays viable in

the long term and the creditors in turn enter into different arrangements with the company with

respect to foregoing a part of the loan, or exchanging a part of the debt for equity shares in the

company, which is also referred to as the debt equity swap, or creditors agreeing to a fixed

moratorium period where both the company and the creditors agree to refrain from taking any

action against each other during the fixed period.

The concept of corporate debt restructuring is part of the external restructuring mechanism of the

company where it has to ensure that it has the assets to back the restructuring program, because

once the company enters into the zone of insolvency, it has little choices to make and prolonged

insolvency then becomes a ground of winding up the company and it loses its separate legal

identity. However, if proper arrangements are made with the creditors, both the company and the

lenders are satisfied with it and the company is able to keep its business thriving.

Corporate Debt Restructuring (CDR) can take a variety of forms. The plan can provide for

conversion of debt into equity, or preference shares convertible into ordinary shares, adjustment

of secured creditors’ rights, a compromise in which creditors waive a part of their claims or

extend term of their debts, modification of Inter Creditor Agreements (ICAs), valuation and

settlement of contingent claims, and the distribution of assets and discharge of liabilities of

members of a group of companies where these have become inextricably entangled so as to make

it difficult to establish the assets and liabilities of any individual company within the group.

Basic principles of Corporate Debt Restructuring13


The international federation of insolvency practitioners (INSOL International) published in 2000

the Statement of Principles for a Global Approach to Multi-Creditor Workouts. These principles

build on the London Approach.

First principle: Where a debtor is found to be in financial difficulties, all relevant

creditors should be prepared to cooperate with each other to give sufficient (though

limited) time (a “standstill period”) to the debtor for information about the debtor to be

obtained and evaluated, and for proposals for resolving the debtor’s financial difficulties

to be formulated and assessed, unless such a course is inappropriate in a particular case.

Second principle: During the standstill period, all relevant creditors should agree to

refrain from taking any steps to enforce their claims against or (otherwise than by

disposal of their debt to a third party) to reduce their exposure to the debtor, but are

entitled to expect that during the standstill period their position relative to other creditors

will not be prejudiced.

Third principle: During the standstill period, the debtor should not take any action that

might adversely affect the prospective return to relevant creditors (either collectively or

individually) as compared with the position at the standstill commencement date.

Fourth principle: The interests of relevant creditors are best served by coordinating their

response to a debtor in financial difficulty. Such coordination will be facilitated by the

selection of one or more representative coordination committees and by the appointment

of professional advisers to advise and assist such committees and, where appropriate, the

relevant creditors participating in the process as a whole.

Fifth principle: During the standstill period, the debtor should provide, and allow

relevant creditors and/or their professional advisors reasonable and timely access to all

relevant information relating to its assets, liabilities, business and prospects, in order to

enable proper evaluation to be made of its financial position and any proposals to be

made to relevant creditors.

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Sixth principle: Proposals for resolving the financial difficulties of the debtor and, so far

as practicable, arrangements between relevant creditors relating to any standstill, should

reflect applicable law and the relative positions of relevant creditors at the standstill

commencement date.

Seventh principle: Information obtained for the purposes of the process concerning the

assets, liabilities and business of the debtor and any proposals for resolving its difficulties

should be made available to all relevant creditors and should, unless already publicly

available, be treated as confidential.

Eighth principle: If additional funding is provided during the standstill period or under

any rescue or restructuring proposals, the repayment of such additional funding should,

so far as practicable, be accorded priority status as compared to other indebtedness or

claims of relevant creditors.

Regard to the INSOL Principles remains a useful starting point in the design of out of court debt

restructuring guidelines. However, where creditors are large in number, diversified beyond banks

and include both domestic and international interests, coordination problems become more

difficult to manage within a London Approach model: specifically, unanimous agreement among

creditors and voluntary adherence to standstills can prove a major impediment to operation of

out-of-court restructuring principles.

Importance of CDR

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Restructuring is a societal convention to attempt to assist anyone in distress. Similarly,

restructuring is a tool to lend a hand of assistance to borrowers who are temporarily in distress, in

particular, where the distress is caused by circumstances beyond the control of the borrower.

Thus, debt restructuring may be required under certain circumstances viz. a general downturn in

the economy which results in the deterioration in the financial health of borrowers. It may also

be warranted in case of emergence of legal or other issues that cause delays, particularly in cases

of project implementation. External developments, such as global factors may also result in

widespread impact on the financial health of borrowers and may necessitate use of restructuring

as a tool to help the borrower tide over difficult circumstances.

The benefits of CDR from the point of view of corporate are as follows:

Avoid Business Bankruptcy

Satisfy creditors based on what your business can afford

Reduce debt and stretch it out over time into fixed, affordable monthly payments

Spend less time dealing with creditors, collection agencies and attorneys

Spend more time creating revenue and optimizing your business

Keep doors open and retain management control

Avoid unnecessary legal fees

Balance budget and manage cash flow

Preserve vendor relations and keep vital supply lines open

Rebuild credit and credibility

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Corporate Debt Restructuring: The Indian Mechanism

In 2001, the RBI set up the corporate debt restructuring (CDR) mechanism as a voluntary mechanism to facilitate restructuring debts of viable corporates outside the normal insolvency law process. The Indian CDR mechanism is largely based on the London Approach, formulated in the early nineties wherein creditors are encouraged to opt for out-of-court agreements following certain principles to “minimise losses to creditors, avoid unnecessary liquidation of viable debtors and offer continued financial support to viable borrowers.” The approach grew from the idea that in a multi-creditor restructuring, the lenders would probably achieve better returns through collective and coordinated efforts to rescue a firm in distress, rather than force it into formal insolvency.

In 2008, comprehensive guidelines for both institutional restructuring (CDR) as well as non-institutional restructuring (non-CDR) were issued; Master guidelines were issued in 2012. Following the report of the working group, the RBI revised the CDR Guidelines on 30 May 2013, bringing in several new and important changes. The CDR regime is briefly described below.

Objective

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and

transparent mechanism for restructuring the corporate debts of viable entities facing problems,

outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.

In particular, the framework will aim at preserving viable corporates that are affected by certain

internal and external factors and minimize the losses to the creditors and other stakeholders

through an orderly and coordinated restructuring programme.

Structure

CDR system in the country will have a three tier structure:

CDR Standing Forum and its Core Group

CDR Empowered Group

CDR Cell

CDR Standing Forum

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The CDR Standing Forum would be the representative general body of all financial institutions

and banks participating in CDR system. All financial institutions and banks should participate in

the system in their own interest. CDR Standing Forum will be a self-empowered body, which

will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and borrowers (by

consultation) to amicably and collectively evolve policies and guidelines for working out debt

restructuring plans in the interests of all concerned. The CDR Standing Forum shall comprise of

Chairman & Managing Director, Industrial Development Bank of India Ltd; Chairman, State

Bank of India; Managing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks'

Association as well as Chairmen and Managing Directors of all banks and financial institutions

participating as permanent members in the system. Since institutions like Unit Trust of India,

General Insurance Corporation, Life Insurance Corporation may have assumed exposures on

certain borrowers, these institutions may participate in the CDR system. 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 would also lay down the policies and guidelines including those relating to the

critical parameters for restructuring (for example, maximum period for a unit to become viable

under a restructuring package, minimum level of promoters’ sacrifice etc.) to be followed by the

CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth

functioning and adherence to the prescribed time schedules for debt restructuring. It can also

review any individual decisions of the CDR Empowered Group and CDR Cell. The CDR

Standing Forum may also formulate guidelines for dispensing special treatment to those cases,

which are complicated and are likely to be delayed beyond the time frame prescribed for

processing.

CDR Empowered Group

The individual cases of corporate debt restructuring shall be decided by the CDR Empowered

Group, consisting of ED level representatives of Industrial Development Bank of India Ltd.,

ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level

representatives of financial Institutions and banks who have an exposure to the concerned 18


company. The level of representation of banks/ financial institutions on the CDR Empowered

Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the

necessary commitments including sacrifices, made towards debt restructuring.

There should be a general authorisation by the respective Boards of the participating institutions /

banks in favour of their representatives on the CDR Empowered Group, authorizing them to take

decisions on behalf of their organization, regarding restructuring of debts of individual

corporates. The CDR Empowered Group will consider the preliminary report of all cases of

requests of restructuring, submitted to it by the CDR Cell. After the Empowered Group decides

that restructuring of the company is prima-facie feasible and the enterprise is potentially viable in

terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring

package will be worked out by the CDR Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of debt restructuring,

examine the viability and rehabilitation potential of the Company and approve the restructuring

package within a specified time frame of 90 days, or at best within 180 days of reference to the

Empowered Group.

The CDR Empowered Group shall decide on the acceptable viability benchmark levels on the

following illustrative parameters, which may be applied on a case-by-case basis, based on the

merits of each case:

Return on Capital Employed (ROCE),

Debt Service Coverage Ratio (DSCR),

Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),

Extent of sacrifice.

The decisions of the CDR Empowered Group shall be final. If restructuring of debt is found to be

viable and feasible and approved by the Empowered Group, the company would be put on the

restructuring mode. If restructuring is not found viable, the creditors would then be free to take

necessary steps for immediate recovery of dues and / or liquidation or winding up of the

company, collectively or individually

CDR Cell19


The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all

their functions. The CDR Cell will make the initial scrutiny of the proposals received from

borrowers / creditors, by calling for proposed rehabilitation plan and other information and put

up the matter before the CDR Empowered Group, within one month to decide whether

rehabilitation is prima facie feasible. If found feasible, the CDR Cell will proceed to prepare

detailed Rehabilitation Plan with the help of creditors and, if necessary, experts to be engaged

from outside. If not found prima facie feasible, the creditors may start action for recovery of their

dues.

All references for corporate debt restructuring by creditors or borrowers will be made to the

CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the

corporate, to work out a preliminary restructuring plan in consultation with other stakeholders

and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan

in terms of the general policies and guidelines approved by the CDR Standing Forum and place

for consideration of the Empowered Group within 30 days for decision. The Empowered Group

can approve or suggest modifications but ensure that a final decision is taken within a total

period of 90 days. However, for sufficient reasons the period can be extended up to a maximum

of 180 days from the date of reference to the CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell is at present housed in

Industrial Development Bank of India Ltd. However, it may be shifted to another place if

considered necessary, as may be decided by the Standing Forum.

Category of Corporates

It is observed that borrower-Corporates get into a stress situation because of various external and

internal factors. The restructuring schemes are accordingly formulated envisaging various

actions on the part of the borrowers and participating lenders. Based on experience and various

features of the borrower-corporates and their promoters/sponsors, the borrower-corporates are

categorized into four Classes for the purpose of stipulation of standard terms & conditions under

the CDR Mechanism. The classification is as under:

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Borrower Class 'A': Corporates affected by external factors pertaining economy and

Industry.

Borrower Class 'B': Corporates/promoters affected by external factors and also having

weak resources, inadequate vision, and not having support of professional management.

Borrower Class 'C': Over-ambitious promoters; and borrower-corporates which diverted

funds to related/unrelated fields with/without lenders' permission.

Borrower Class 'D': Financially undisciplined borrower-corporates.

Eligibility Criterion

The CDR Mechanism is not applicable to accounts involving only one financial institution or one

bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium

accounts of corporate borrowers with outstanding fund-based and non-fund based exposure of

Rs.10 crore and above by banks and institutions.

Category 1 CDR system

It is applicable only to accounts classified as 'standard' and 'sub-standard'. There may be a

situation where a small portion of debt by a bank might be classified as doubtful. In that

situation, if the account has been classified as ‘standard’/ ‘substandard’ in the books of at least

90% of creditors (by value), the same would be treated as standard / substandard, only for the

purpose of judging the account as eligible for CDR, in the books of the remaining 10% of

creditors. There would be no requirement of the account / company being sick, NPA or being in

default for a specified period before reference to the CDR system. However, potentially viable

cases of NPAs will get priority. While corporates indulging in frauds and malfeasance even in a

single bank will continue to remain ineligible for restructuring under CDR mechanism. BIFR

cases are not eligible for restructuring under the CDR system. However, large value BIFR cases,

may be eligible for restructuring under the CDR system if specifically recommended by the CDR

Core Group.

Category 2 CDR System

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There have been instances where the projects have been found to be viable by the creditors but

the accounts could not be taken up for restructuring under the CDR system as they fell under

‘doubtful’ category. Hence, a second category of CDR is introduced for cases where the accounts

have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75% of

creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the

account and consent for such restructuring, subject to the following conditions:

It will not be binding on the creditors to take up additional financing worked out under the debt

restructuring package and the decision to lend or not to lend will depend on each creditor bank /

FI separately. In other words, under the proposed second category of the CDR mechanism, the

existing loans will only be restructured and it would be up to the promoter to firm up additional

financing arrangement with new or existing creditors individually.

All other norms under the CDR mechanism such as the standstill clause, asset classification

status during the pendency of restructuring under CDR, etc., will continue to be applicable to this

category also.

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Financial Viability Parameters

The following financial ratios are essential when a debt restructurization has to be done along

with the adjustments that have to be considered while calculating the individual components of

the formulas:

Return on Capital Employed

The Return on Capital Employed (ROCE) reflects the earning capacity of assets deployed.

ROCE is expressed as a percentage of total earnings (return) net of depreciation to the total

capital employed. “Total Earnings” is PBT plus total interest plus lease rentals.

“Capital Employed‟ is the aggregate of net fixed assets excluding capital work in progress, lease

rentals payable, investments, and total current assets less creditors and provisions.

Normally, intangible assets are excluded for calculation of ROCE. Having regard to the fact that

stressed standard assets as well as sub-standard and doubtful assets are considered for

restructuring, it may be possible that fixed assets in such cases might be depreciated to a large

extent due to accounting practices although the facilities might not have been utilized. Similarly,

interest on loans accrued and fallen due but not paid, might have been used to finance cash

losses. In other words, the fund is reinvested in the project. These normally get reflected in

accumulated loss, which is treated as intangible asset. Therefore, while working out the total

capital employed, suitable adjustment may be made for unabsorbed depreciation and unserviced

interest to lenders. A minimum ROCE equivalent to 5 year G-Sec plus 2% may be considered as

adequate.

Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) represents the debt servicing capability of the

borrower. In the normal course, DSCR is the ratio of gross cash available to meet the debt-

servicing requirement. Gross cash available is the sum of gross cash accrual plus interest on term

debt plus lease rentals. Debt servicing requirement is sum of repayment of term debt, interest on

term debt plus lease rent payable.

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Gross cash accrual may not be considered as a true representation of available cash flow to

service debt as gross cash accrual does not take into account the actual cash available after

netting out the variation in stocks/inventory position. [It has to be acknowledged that, interest

and principal cannot be serviced out of earnings, which is an accounting concept‟.] Debt

servicing has to be made in cash. Many transactions and accounting entries can affect earnings,

but not cash. Therefore, for calculation of DSCR, actual cash available with the borrower should

be taken into consideration and accordingly the DSCR calculation for restructured assets should

be as under:

Available Cash Flow (ACF) will be net cash position during the year (total gross profit plus

outside funds if any available less total requirement including build-up of inventory/debtor /

normal capital expenditure etc.) repayment of public deposits should be included for calculation

of DSCR.

The adjusted Debt Service Coverage Ratio (DSCR) should be >1.25 within the 7 years period in

which the unit should become viable and on year-to-year basis DSCR to be above 1. The normal

DSCR for 10 years repayment period should be around 1.33:1.

Gap between Internal Rate of Return and Cost of Capital

The Internal Rate of Return (IRR) is computed as the post-tax return on capital employed during

the project life based on discounted (net) cash flow method. Cash outflows each year would

include capital expenditure on the project and increase in gross working capital. Cash inflows

each year would include inflows from the operations of the project each year, recovery of

working capital in the last year of project life and residual value of capital assets in the last year

of project life.

While the above definition may be relevant for project finance, for restructured cases, the

investment would have already taken place and the fixed assets would have depreciated to a

large extent for such existing cases. While the year of restructuring could be considered as the 24


zero year, aggregate of net fixed assets, net working capital and investments could be treated as

total assets deployed. Cash inflows would have the same definition as for project finance. Project

life should be considered as 15 years irrespective of the vintage of the facilities but depending on

economic life.

Cost of capital is the post-tax weighted average cost of the funds employed. Since the basic

purpose of the restructuring exercise is to recover the lenders‟ dues, it is felt that zero cost could

be assigned to equity funds (equity and reserves). Cost to be assigned to the debt would be the

actual cost proposed in the restructuring package. Calculation of tax shield for the purpose of

working out the effective cost of debt funds will be as per usual institutional guidelines.

The benchmark gap between Internal Rate of Return and Average Cost of Funds should be at

least one percent.

Extent of Sacrifice

Waivers and sacrifices in a stressed asset which approaches lenders for restructuring would

depend on the state of affairs and the viability of the borrower-corporate as well as the possibility

of its revival/survival. Since the basic objective of the restructuring exercise is to recover the

lenders‟ dues and ensure productive use of assets, the extent of sacrifice would be a function of

the quantum of loan, past payment record, interest rates charged and booked to profit in the past,

as also alternative avenues available for recovery. Considering the very low probability of

recovering the entire amount of dues through legal and other routes, the chances of recovering

the dues might be better in a restructuring exercise, which also helps other stake-holders such as

labour, equity holders, the exchequer and the economy in general.

In this background, it is very difficult to evolve a benchmark for the extent of sacrifices. Going

by CDR experience, the sacrifice on the part of lenders would be waiver of liquidated damages

and in some cases compound interest. Waiver of simple interest and principal should be resorted

to in deserving cases only. Economic sacrifices in the form of reduction in interest/coupon rate

should be avoided. While the thrust of the restructuring exercise should be on recovering the

maximum possible amount from the borrowers, conversion of a part of the sacrifice into equity

25


or any other instrument should also be explored. This would be beneficial from the point of view

of sharing the upside when the fortunes of the company improve pursuant to restructuring.

Other Financial Parameters

Break-Even Analysis

Break-even analysis should be carried out. Operating and cash break-even points should be

worked out and they should be comparable with the industry norms.

Gross Profit Margin

Gross Profit or Earnings Before Interest, Depreciation, and Tax (EBIDTA) is considered a good

measure to compare the performance of a corporate in relation to the industry. Gross Profit

Margin (GPM) for the industry as a whole, to which the company belongs, is available in

published documents/databases (like 'Cris-Infac', 'Prowess' or similar database ventures). Wide

variation, if any, of company’s GPM from the industry average would be required to be

explained with qualitative information.

While GPM is considered as a good indicator of the reasonableness of the assumptions

underlying the profitability projections, it is necessary that various elements of profitability

estimates such as capacity utilization, price trend and price realization per unit, cost structure,

etc. should be comparable to those of the operating units in the same industry. It is also

suggested that the company’s past performance for say last 3-5 years and future projections for

next 5 years should be given in the restructuring package on the same worksheet to have

comparison of sales, sales realization, cost components, GP, GPM, interest cost, etc.

Loan Life Ratio

Loan life ratio (LLR) is a concept, which is used internationally in project financing activity. The

ratio is based on the available cash flow and present value principle.

26


The discounting factor may be the average yield expected by the lenders on the total liabilities,

or alternatively, the benchmark ROCE. This ratio is similar to the DSCR based on the modified

method (Actual Cash Flow method). In project financing, sometimes LLR is used to arrive at the

amount of loan that could be given to a corporate. On the same analogy, LLR can be used to

arrive at sustainable debt in a restructuring exercise as also the yield. A benchmark LLR of 1.4,

which would give a cushion of 40% to the amount of loan to be serviced, may be considered

adequate.

27


Present Status of CDR cases

Present status of CDR cases received in CDR cell are as under :

(As on 31st December 2014 since inception)

No. of

cases

Aggregate debt (in Rs.

Crore)

Total referece received by CDR cell 647 452940

Total cases approved 520 380885

Cases rejected 122 65925

Cases under consideration 5 613028


Present status of CDR cases approved by CDR cell are as under:

(As on 31st December 2014 since inception)

No. of

cases

Aggregate debt (in Rs.

Crore)

Cases executed sucessfully 77 58682

Cases withdrawn on account of package

failure

155 50104

Live cases in CDR cell 288 272099

Out of a total number of 256 cases with an aggregate debt of Rs. 116194 crore as on March 31

2010, 215 cases with an aggregate debt of Rs 104299 crore have been approved by the CDR Cell

of IDBI Bank Limited. The maximum number of cases approved by the CDR Cell belongs to the

textile sector while the maximum share of the aggregate debt approved by the CDR Cell belongs

to the Iron and Steel sector at 35.16%

The proposals for CDR reference by the corporate do not address issues like reasons for the

present state of the Corporate, areas of Management failure, steps proposed to ensure non-

repetition, promoter’s sacrifice, assumptions of CDR package and basis thereof, what happens if

the entire debt is considered sustainable and sensitivity analysis at different interest rates which

needs to be looked into, informed Shri Sona Lal Datta, Assistant General Manager, Consultancy

Services, State Bank of India, Essar Steel, Essar Oil, Jindal Steel, Jsw, Ispat Industries, Mukund,

Neelanchal Ispat, India Cements, Saurastra Cements, Arvind Mills, Dhampur Sugars, Mawana

Sugar, Nfcl, Cesc, Wockhardt, Vishal Retail were some of the companies that went through CDR

29


Mechanism, informed Shri Ravindra Loonkar, Vice President, SBI Capital Market Limited at the

PHD Chamber Workshop.

It was highlighted by the industry representatives at PHD Chamber that the CDR cell does not

address the needs of the small scale sector and a rethinking is required to wards that aspect by the

CDR Cell.

Prudential and Accounting Issues

As per RBI guidelines, the regulatory concession in asset classification and provisioning will be

available if there is compliance of six conditions stipulated in RBI guidelines viz.

The dues to the bank are “fully secured”. The condition of being fully secured by tangible

security will not be applicable in the infrastructure projects, provided the cash flows generated

from these projects are adequate for repayment of advance, the financing banks have in place an

appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on

these cash flows.

The unit becomes viable in 10 years, if it is engaged in infrastructure activities and in 7 years in

the case of other units.

The repayment period of the restructured advance including moratorium period, if any, does not

exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances.

Promoters’ sacrifice and additional funds brought by them should be minimum of 15% of the

banks’ sacrifice.

Personal Guarantee is offered by the promoter except when the unit is affected by the external

factors pertaining to the economy and industry,

The restructuring under consideration is not a repeated restructuring.

30


CDR Mechanism in India

Objective

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and

transparent mechanism for restructuring the corporate debts of viable entities facing problems,

outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.

In particular, the framework will aim at preserving viable corporates that are affected by certain

internal and external factors and minimize the losses to the creditors and other stakeholders

through an orderly and coordinated restructuring programme.

Structure

CDR system in the country will have a three tier structure:

CDR Standing Forum and its Core Group

CDR Empowered Group

CDR Cell

CDR Standing Forum

The CDR Standing Forum would be the representative general body of all financial institutions

and banks participating in CDR system. All financial institutions and banks should participate in

the system in their own interest. CDR Standing Forum will be a self-empowered body, which

will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and borrowers (by

consultation) to amicably and collectively evolve policies and guidelines for working out debt

restructuring plans in the interests of all concerned. The CDR Standing Forum shall comprise of

Chairman & Managing Director, Industrial Development Bank of India Ltd; Chairman, State

Bank of India; Managing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks'

Association as well as Chairmen and Managing Directors of all banks and financial institutions

participating as permanent members in the system. Since institutions like Unit Trust of India,

General Insurance Corporation, Life Insurance Corporation may have assumed exposures on 31


certain borrowers, these institutions may participate in the CDR system. 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 would also lay down the policies and guidelines including those relating to the

critical parameters for restructuring (for example, maximum period for a unit to become viable

under a restructuring package, minimum level of promoters’ sacrifice etc.) to be followed by the

CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth

functioning and adherence to the prescribed time schedules for debt restructuring. It can also

review any individual decisions of the CDR Empowered Group and CDR Cell. The CDR

Standing Forum may also formulate guidelines for dispensing special treatment to those cases,

which are complicated and are likely to be delayed beyond the time frame prescribed for

processing.

CDR Empowered Group

The individual cases of corporate debt restructuring shall be decided by the CDR Empowered

Group, consisting of ED level representatives of Industrial Development Bank of India Ltd.,

ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level

representatives of financial Institutions and banks who have an exposure to the concerned

company. The level of representation of banks/ financial institutions on the CDR Empowered

Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the

necessary commitments including sacrifices, made towards debt restructuring. There should be a

general authorisation by the respective Boards of the participating institutions / banks in favour

of their representatives on the CDR Empowered Group, authorizing them to take decisions on

behalf of their organization, regarding restructuring of debts of individual corporates. The CDR

Empowered Group will consider the preliminary report of all cases of requests of restructuring,

submitted to it by the CDR Cell. After the Empowered Group decides that restructuring of the

company is prima-facie feasible and the enterprise is potentially viable in terms of the policies

and guidelines evolved by Standing Forum, the detailed restructuring package will be worked out

by the CDR Cell in conjunction with the Lead Institution. The CDR Empowered Group would be 32


mandated to look into each case of debt restructuring, examine the viability and rehabilitation

potential of the Company and approve the restructuring package within a specified time frame of

90 days, or at best within 180 days of reference to the Empowered Group. The CDR Empowered

Group shall decide on the acceptable viability benchmark levels on the following illustrative

parameters, which may be applied on a case-by-case basis, based on the merits of each case:

Return on Capital Employed (ROCE),

Debt Service Coverage Ratio (DSCR),

Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),

Extent of sacrifice.

The decisions of the CDR Empowered Group shall be final. If restructuring of debt is found to be

viable and feasible and approved by the Empowered Group, the company would be put on the

restructuring mode. If restructuring is not found viable, the creditors would then be free to take

necessary steps for immediate recovery of dues and / or liquidation or winding up of the

company, collectively or individually CDR Cell

The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all

their functions. The CDR Cell will make the initial scrutiny of the proposals received from

borrowers / creditors, by calling for proposed rehabilitation plan and other information and put

up the matter before the CDR Empowered Group, within one month to decide whether

rehabilitation is prima facie feasible. If found feasible, the CDR Cell will proceed to prepare

detailed Rehabilitation Plan with the help of creditors and, if necessary, experts to be engaged

from outside. If not found prima facie feasible, the creditors may start action for recovery of their

dues.

All references for corporate debt restructuring by creditors or borrowers will be made to the

CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the

corporate, to work out a preliminary restructuring plan in consultation with other stakeholders

and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan

in terms of the general policies and guidelines approved by the CDR Standing Forum and place

33


for consideration of the Empowered Group within 30 days for decision. The Empowered Group

can approve or suggest modifications but ensure that a final decision is taken within a total

period of 90 days. However, for sufficient reasons the period can be extended up to a maximum

of 180 days from the date of reference to the CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell is at present housed in

Industrial Development Bank of India Ltd. However, it may be shifted to another place if

considered necessary, as may be decided by the Standing Forum.

It is observed that borrower-Corporates get into a stress situation because of various external and

internal factors. The restructuring schemes are accordingly formulated envisaging various

actions on the part of the borrowers and participating lenders. Based on experience and various

features of the borrower-corporates and their promoters/sponsors, the borrower-corporates are

categorized into four Classes for the purpose of stipulation of standard terms & conditions under

the CDR Mechanism. The classification is as under:

Borrower Class 'A': Corporates affected by external factors pertaining economy and Industry.

Borrower Class 'B': Corporates/promoters affected by external factors and also having weak

resources, inadequate vision, and not having support of professional management.

Borrower Class 'C': Over-ambitious promoters; and borrower-corporates which diverted funds

to related/unrelated fields with/without lenders' permission.

Borrower Class 'D': Financially undisciplined borrower-corporates.

Eligibility Criterion

The CDR Mechanism is not applicable to accounts involving only one financial institution or one

bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium

accounts of corporate borrowers with outstanding fund-based and non-fund based exposure of

Rs.10 crore and above by banks and institutions.

Category 1 CDR system

34


It is applicable only to accounts classified as 'standard' and 'sub-standard'. There may be a

situation where a small portion of debt by a bank might be classified as doubtful. In that

situation, if the account has been classified as ‘standard’/ ‘substandard’ in the books of at least

90% of creditors (by value), the same would be treated as standard / substandard, only for the

purpose of judging the account as eligible for CDR, in the books of the remaining 10% of

creditors. There would be no requirement of the account / company being sick, NPA or being in

default for a specified period before reference to the CDR system. However, potentially viable

cases of NPAs will get priority. While corporates indulging in frauds and malfeasance even in a

single bank will continue to remain ineligible for restructuring under CDR mechanism. BIFR

cases are not eligible for restructuring under the CDR system. However, large value BIFR cases,

may be eligible for restructuring under the CDR system if specifically recommended by the CDR

Core Group.

Category 2 CDR System

There have been instances where the projects have been found to be viable by the creditors but

the accounts could not be taken up for restructuring under the CDR system as they fell under

‘doubtful’ category. Hence, a second category of CDR is introduced for cases where the accounts

have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75% of

creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the

account and consent for such restructuring, subject to the following conditions:

It will not be binding on the creditors to take up additional financing worked out under the debt

restructuring package and the decision to lend or not to lend will depend on each creditor bank /

FI separately. In other words, under the proposed second category of the CDR mechanism, the

existing loans will only be restructured and it would be up to the promoter to firm up additional

financing arrangement with new or existing creditors individually.

All other norms under the CDR mechanism such as the standstill clause, asset classification

status during the pendency of restructuring under CDR, etc., will continue to be applicable to this

category also.

35


Financial Viability Parameters

The following financial ratios are essential when a debt restructurization has to be done along

with the adjustments that have to be considered while calculating the individual components of

the formulas:

Return on Capital Employed

The Return on Capital Employed (ROCE) reflects the earning capacity of assets deployed.

ROCE is expressed as a percentage of total earnings (return) net of depreciation to the total

capital employed. “Total Earnings” is PBT plus total interest plus lease rentals.

“Capital Employed‟ is the aggregate of net fixed assets excluding capital work in progress, lease

rentals payable, investments, and total current assets less creditors and provisions.

Normally, intangible assets are excluded for calculation of ROCE. Having regard to the fact that

stressed standard assets as well as sub-standard and doubtful assets are considered for

restructuring, it may be possible that fixed assets in such cases might be depreciated to a large

extent due to accounting practices although the facilities might not have been utilized. Similarly,

interest on loans accrued and fallen due but not paid, might have been used to finance cash

losses. In other words, the fund is reinvested in the project. These normally get reflected in

accumulated loss, which is treated as intangible asset. Therefore, while working out the total

capital employed, suitable adjustment may be made for unabsorbed depreciation and unserviced

interest to lenders. A minimum ROCE equivalent to 5 year G-Sec plus 2% may be considered as

adequate.

Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) represents the debt servicing capability of the

borrower. In the normal course, DSCR is the ratio of gross cash available to meet the debt-

servicing requirement. Gross cash available is the sum of gross cash accrual plus interest on term

debt plus lease rentals. Debt servicing requirement is sum of repayment of term debt, interest on

term debt plus lease rent payable.

36


Gross cash accrual may not be considered as a true representation of available cash flow to

service debt as gross cash accrual does not take into account the actual cash available after

netting out the variation in stocks/inventory position. [It has to be acknowledged that, interest

and principal cannot be serviced out of earnings, which is an accounting concept‟.] Debt

servicing has to be made in cash. Many transactions and accounting entries can affect earnings,

but not cash. Therefore, for calculation of DSCR, actual cash available with the borrower should

be taken into consideration and accordingly the DSCR calculation for restructured assets should

be as under:

Available Cash Flow (ACF) will be net cash position during the year (total gross profit plus

outside funds if any available less total requirement including build-up of inventory/debtor /

normal capital expenditure etc.) repayment of public deposits should be included for calculation

of DSCR.

The adjusted Debt Service Coverage Ratio (DSCR) should be >1.25 within the 7 years period in

which the unit should become viable and on year-to-year basis DSCR to be above 1. The normal

DSCR for 10 years repayment period should be around 1.33:1.

Gap between Internal Rate of Return and Cost of Capital

The Internal Rate of Return (IRR) is computed as the post-tax return on capital employed during

the project life based on discounted (net) cash flow method. Cash outflows each year would

include capital expenditure on the project and increase in gross working capital. Cash inflows

each year would include inflows from the operations of the project each year, recovery of

working capital in the last year of project life and residual value of capital assets in the last year

of project life.

While the above definition may be relevant for project finance, for restructured cases, the

investment would have already taken place and the fixed assets would have depreciated to a

large extent for such existing cases. While the year of restructuring could be considered as the 37


zero year, aggregate of net fixed assets, net working capital and investments could be treated as

total assets deployed. Cash inflows would have the same definition as for project finance. Project

life should be considered as 15 years irrespective of the vintage of the facilities but depending on

economic life.

Cost of capital is the post-tax weighted average cost of the funds employed. Since the basic

purpose of the restructuring exercise is to recover the lenders‟ dues, it is felt that zero cost could

be assigned to equity funds (equity and reserves). Cost to be assigned to the debt would be the

actual cost proposed in the restructuring package. Calculation of tax shield for the purpose of

working out the effective cost of debt funds will be as per usual institutional guidelines.

The benchmark gap between Internal Rate of Return and Average Cost of Funds should be at

least one percent.

Extent of Sacrifice

Waivers and sacrifices in a stressed asset which approaches lenders for restructuring would

depend on the state of affairs and the viability of the borrower-corporate as well as the possibility

of its revival/survival. Since the basic objective of the restructuring exercise is to recover the

lenders‟ dues and ensure productive use of assets, the extent of sacrifice would be a function of

the quantum of loan, past payment record, interest rates charged and booked to profit in the past,

as also alternative avenues available for recovery. Considering the very low probability of

recovering the entire amount of dues through legal and other routes, the chances of recovering

the dues might be better in a restructuring exercise, which also helps other stake-holders such as

labour, equity holders, the exchequer and the economy in general.

In this background, it is very difficult to evolve a benchmark for the extent of sacrifices. Going

by CDR experience, the sacrifice on the part of lenders would be waiver of liquidated damages

and in some cases compound interest. Waiver of simple interest and principal should be resorted

to in deserving cases only. Economic sacrifices in the form of reduction in interest/coupon rate

should be avoided. While the thrust of the restructuring exercise should be on recovering the

maximum possible amount from the borrowers, conversion of a part of the sacrifice into equity

38


or any other instrument should also be explored. This would be beneficial from the point of view

of sharing the upside when the fortunes of the company improve pursuant to restructuring.

Other Financial Parameters

Break-Even Analysis

Break-even analysis should be carried out. Operating and cash break-even points should be

worked out and they should be comparable with the industry norms.

Gross Profit Margin

Gross Profit or Earnings Before Interest, Depreciation, and Tax (EBIDTA) is considered a good

measure to compare the performance of a corporate in relation to the industry. Gross Profit

Margin (GPM) for the industry as a whole, to which the company belongs, is available in

published documents/databases (like 'Cris-Infac', 'Prowess' or similar database ventures). Wide

variation, if any, of company’s GPM from the industry average would be required to be

explained with qualitative information.

While GPM is considered as a good indicator of the reasonableness of the assumptions

underlying the profitability projections, it is necessary that various elements of profitability

estimates such as capacity utilization, price trend and price realization per unit, cost structure,

etc. should be comparable to those of the operating units in the same industry. It is also

suggested that the company’s past performance for say last 3-5 years and future projections for

next 5 years should be given in the restructuring package on the same worksheet to have

comparison of sales, sales realization, cost components, GP, GPM, interest cost, etc.

Loan Life Ratio

Loan life ratio (LLR) is a concept, which is used internationally in project financing activity. The

ratio is based on the available cash flow and present value principle.

39


The discounting factor may be the average yield expected by the lenders on the total liabilities,

or alternatively, the benchmark ROCE. This ratio is similar to the DSCR based on the modified

method (Actual Cash Flow method). In project financing, sometimes LLR is used to arrive at the

amount of loan that could be given to a corporate. On the same analogy, LLR can be used to

arrive at sustainable debt in a restructuring exercise as also the yield. A benchmark LLR of 1.4,

which would give a cushion of 40% to the amount of loan to be serviced, may be considered

adequate.

40


Live Case Study

The Company X (due to confidentiality the original name of the company is not declared) is a

Non Banking Financial Company registered with RBI as Category A - Hire Purchase and

Leasing Company. It is primarily engaged in the business of financing of tractors, construction

equipments, commercial vehicles and other passenger carrying multi utility vehicles, cars, etc.

The company’s main focus has been to finance used asset in the above segments at a gross yields

in the range of 24% to 26%. The company has built a position of distinct advantage over other

NBFC's in its core segments of semi urban and rural markets by virtue of having been present for

more than two decades & thereby catering to the needs of farmers for purchase of tractors and

farm equipment.

The company operates through a network of 48 branches located in semi urban and rural markets

of Andhra Pradesh, Tamil Nadu, Kerala, Karnataka and Maharashtra.

The two most important things that the bank considers before referring the case to the CDR

Mechanism are:

Reasons for the inability of loan – the case is considered only if the reason is external like

recession, change in policies or regulations like banning of imports/ exports of particular

commodity etc. which is actually not in the hands of the promoters. If the reasons are pertaining

to the faulty business model or willful default of the promoters then the bank rejects the plea and

initiates the traditional recovery process discussed in the beginning of the report.

Future Outlook of the Company – Now the bank sees that what will happen to the company if

they lend or restructure the loan. They see the past financials of the company and project the

future cash flows of the company. If the lenders are satisfied with the kind of assumptions and

future revenue generation capacity of the company only then they move forward to restructure

the loan. This also involves the quality of the tie ups that the company has roped in. Suppose the

Company tie ups includes M&M, Sonalika etc then there will be more business for the Company

X and chances of revival are much higher.

Now in the following points we will see the reasons of the failure of the debt servicing capacity

of the Company X.41


Major Problem Areas

COMAPNY X financial position has been deteriorated due to some unavoidable external

reasons, which are enumerated as below:

Adverse Effect of reviewing accounting policy

During the course of finalization of the annual accounts of COMAPNY X for FY 2006-07, the

new management team decided to review accounting practices followed by erstwhile

management. The details of the change in the accounting policies and their impact on the

profitability are as under.

The accounting basis for Additional Finance Charges was changed from receipt basis to accrual

basis leading to increase in income by Rs 237.16 lacs.

The income on account of securitization/ assignment of receivables, which was being amortized

over the tenor of receivables, was booked upfront leading to increase in income by Rs 324.13

lacs.

Collection charges were being booked in income on accrual basis earlier. It was changed to

accounting on receipt basis. This led to a reduction in profit by Rs 2,278.58 lacs.

Certain lease transactions done in 2001 were rescheduled. The balance outstanding in such

accounts was Rs 930 lacs. As there was no realizable value, these assets were written off.

Certain accounts where the outstanding was Rs 1,787 lacs were assigned to the earlier promoters

for Rs 1,400 lacs and the difference was booked as loss.

The cumulative impact of these actions was a loss of Rs 3,034.29.

As a result of the same, the company had to declare losses to the tune of Rs.26.84 Crores. The

board adopted this review in the board meeting held on 26th Jun’07, subject to results of the

ongoing verification of books of accounts.

These losses arising out of legacy issues have put the company in a tight spot in raising further

borrowings and effecting operations.

42


Failure to raise funds through Right Issue

During the month of September 2007, the Board considered a rights issue for a size of Rs.50

crores and Draft Letter of Offer was also filed with SEBI for approval. Though SEBI cleared the

issue in January 2008, the issue had to be aborted due to fall in equity markets.

Effect of failure of company’s effort for a slump sale of COMAPNY X’s business

In April 2008, subsequent to abortion of rights issue, a slump sale of COMAPNY X’s business

on a going concern basis to Zwirn Pragati Capfin Private Limited was initiated to ensure that

operations of COMAPNY X run smoothly.

Company entered into Business Transfer Agreement (BTA) with ZP on 30th September 2008

for the transfer of Business of the Company, including all its tangible & intangible assets and

non-tax liabilities, by way of slump sale for a consideration of Rs. 41.10 crores. However, ZP

later offered only a reduced sale consideration of Rs. 28 Crores due to several reasons including

substantial downward revision in the future business potential of NBFCs on account of rapid

changes in the internal and external market conditions adversely affecting their viability.

But subsequently during the quarter ending 30.06.2009, Zwirn Pragati Capfin Private Limited,

terminated the Business Transfer Agreement (BTA) on account of delay from COMAPNY X in

securing sanction from banks for the slump sale within the stipulated period. Thus the company’s

plan to rejuvenate its operations failed.

Global Recession and its effect on company’s business

COMAPNY X’s revenue generation for the year 2008-09 was severely affected due to global

meltdown. Recovery/repayment from customers was also affected due to the slump in the market

resulting in higher default than normal. Due to slow down in the economic activity, the

realizations from the repossessed assets also came down. All these factors resulted in losses

thereby affecting the financial stability of the company

As a consequence of the termination of BTA in July 2009, all the assets and liabilities proposed

to be transferred to ZP now remained with COMAPNY X and had to be accounted for in

COMAPNY X’s books with effect from 1st October 2008. As a result, the Board advised the 43


executive management to carry out a review of the assets and liabilities so as to resume the

exercise of detailed review which was conducted in 2007 and to conclude the same and to come

up with a final report.

Future Outlook for the Company

Now the second point is focused where the banks see the following things:

The sector analysis in which the Company X is operating and study the demand supply analysis

and growth in the considered industry.

The focus on the future revenue generation capacity based on the relevant assumptions.

Marketing Viability

In our case study PNB did a Market Appraisal for the Company X to ensure future cash flows.

Though the report was not accessible but few points are stated below as per our research done on

this industry:

Demand and Supply Analysis

The Indian economy continued to grow at an enormous pace and recorded a compounded annual

growth rate (CAGR) of 8.6% between 2002-03 and 2006-07. But the recent developments in

global and domestic markets seem to force this trend to reverse because as per the recent facts

India has reached the GDP of more than 8% and the various analysts and economists continue to

remain bullish on the Indian GDP.

The severe liquidity crunch has affected the fresh disbursements of majority of asset financing

NBFCs since these companies depend on regular inflow of funds mainly from Banks and other

financial institutions.

Future Market Demand and Supply

44


Huge potential is envisaged in this sector as majority of this business segment is with un-

organized financiers

The major source of revenue is from the customers who are farmers (who purchase tractors) and

logistic companies (who purchase trucks). The agriculture sector which has shown poor in terms

of growth 2008-09 remains a cause of concern for the growth but the waivers given by the GOI

to farmers on financing of agriculture equipments and machineries will give a filip to this sector.

Logistic Sector grows at approximately 1.2X the GDP of India which means that if India grows

at 9-10% (as per forecasted by various organizations), logistic sector is bound to grow at a

healthy 18-20% in future which will create more need for trucks and other vehicles and thus

more business for the Company X.

Presence of Few players due to complexity of business would mean high entry barrier and thus

fertile ground to operate for the company

Low cost of operations due to various factors like employing local manpower, offices in

rural/semi urban areas etc.

Good margins/spreads expected in future as well because of persistent demand of tractors &

construction equipments.

Now on based on certain assumptions in the following table the cash flow statement was

generated (refer: annexure 2).

Particulars

2009-

10

2010-

11

2011-

12

2012-

13

2013-

14

Interest Rate 15.0% 15.0% 15.0% 15.0% 15.0%

Interest Rate -IRR 27.5% 27.5% 27.5% 27.5% 27.5%

45


Interest Rate (Flat):commission 8.0% 8.0% 8.0% 8.0% 8.0%

Upfront processing charges 2% 2% 2% 2% 2%

New customers per month 20 150 155 155 155

Ticket Size -1 (Loan Size)in lakhs 3 3 3 3 3

Ticket Size -2 5 5 5 5 5

Ticket Size -3 8 8 8 8 8

%age customers in Ticket Size - 1 70% 50% 50% 50% 50%

%age of customers in Ticket Size - 2 20% 15% 15% 20% 20%

%age of customers in Ticket Size - 3 10% 35% 35% 30% 30%

No. of Months 36 36 36 36 36

No. of Collection in a month (per

customer) 1 1 1 1 1

No. of Months 31 31 31 31 31

Cash collateral as a % age of

disbursements 10% 10% 10% 10% 10%

Interest on cash Collateral 12% 12% 12% 12% 12%

No of customers defaulting 8% 8% 8% 8% 8%

Period in which defaulters making

payment (Months) 3 3 3 3 3

Defaulting customers turning into NPA 10% 10% 10% 10% 10%

NPA Provisioning (as a percentage of NPA

Assets) 50% 50% 50% 50% 50%

46


Period of NPA becoming Loss

assets(Months) 12 12 12 12 12

Provision on loss Assets 100% 100% 100% 100% 100%

Loss assets( as a percentage of total NPA

Asset) 8% 8% 8% 8% 8%

Repossessed assets(as a percentage of total

NPA Asset) 60% 60% 60% 60% 60%

After the analysis of the cash flow statement (refer: annexure 2) we came to the following

finding that the cash flow has increased from INR 3178.21 lacs in 2010-11 to INR 3359.45 lacs

in 2016-17 indicating a better and financial stable future of the Company X. The major source

will remain the cash accrual from installments and EMI’s. The long term earning capacity is

affected by the company’s legal binding to buy the Preference shares issued initially against the

term loan given by the bank at a premium of 3%. The increase/decrease in current liabilities from

2014-15 is zero which is questionable.

Now the bank proceeds with the debt restructuring process and decides the cut off date i.e.

March 2010 in our case.The status of loans before loan restructurization is as follows (all figures

in lacs):

47


Term Lenders CDR

FIs Sanctione

d

Repayment O/SIng Vysya Bank 2,500.00 TL 2,108.22 391.78DCB 800.00 TL 703.25 96.75ICICI Bank 5,884.26 US

L

5,850.55 33.71Total 6684.26 8,662.02 522.24

Working Capital Lenders (CDR)

Name of the Bank Sanctioned Limit Outstanding As on 31.03.10Punjab National Bank 1,000.00 930.08 The Dhanalakashmi Bank Ltd 500.00 493.41 Bank of Baroda 216.00 15.36 Canara Bank 1,200.00 1,214.90 Indian Overseas Bank 900.00 828.84Bank of India 1,500.00 1,470.55The Federal Bank Ltd 1,300.00 1,261.43 State Bank of Hyderabad 500.00 469.37 Ing Vysya Bank Ltd 800.00 785.85 UCO Bank 950.00 937.78 State Bank of Travancore 1,000.00 962.32 YES Bank 1,500.00 1,428.29 TOTAL 11,366.00 10,798.18

Non CDR Lenders

Term debtors Sanctioned Limit Outstanding

As on 31.03.10Tamilnadu Industrial Corporation Ltd 1,000.00 254.70Total 1,000.00 254.70Working Capital LendersThe Catholic Syrian Bank Ltd 850.00 835.01HSBC 1,000.00 Total 1,850.00 1,772.81

48


Central Electronics 78.18Fullerton 652.71

Grand Total 730.89Restructuring Proposal

As per the Guidelines in this proposal all the banks whose exposure were less than INR 1 crore

had the option of this exiting the scheme at a discount of 40%. Under this clause the following

three banks exited the Restructuring Scheme.

Lenders Total O/S 60% 40%ICICI (TL) 33.71 20.226 13.484Bank of Baroda (WC) 15.36 9.216 6.144Development Credit bank Ltd

(TL)

96.75 58.05 38.7

For the rest of the lenders the restructurization of debts was done in the following manner:

Restructurization of term loans

The total outstanding term loans for the company X (NBFC) as on the cut off date 31st March

2010 is as follows:

Sno. Banks Amount1. Ing Vysya Bank Ltd 391.78 2. The Tamilnadu Industrial Investment Corporation Ltd 254.70

TOTAL 646.48

The revised repayment of the installments and interest is shown in the following chart.

It can be seen that no principal payment will be taken by the banks during the moratorium period

which has been increased from the cutoff date i.e. 31st March 2010 for a period of 18 months till

31st September 2011.

Repayment in 72 monthly installments commencing from 01.10.11 and ending on 30.09.2017

49


Term loan to carry ballooning interest rate of 7% p.a.in the year 2009-10 which shall be

increased by 1% each year till it reaches a level of 10% in the year 2012-13 after which it shall

be increased by 2% for the year 2013-14 & 2014-15 and again 1% from 2015-15 till it reaches

16.50% in 2016-17 providing an ROI of 10.54% p.a. approx.

Interest From 1.04.2010 to 30.09.2011 shall be funded through FITL which sums to a total of

INR 72.35 lacs.

Repayment Schedule of Term Loan (Rs. in Lacs)

Particulars

2009-

10

(01.04.

10-

30.09.

10)

2010-

11

2011-

12 2012-13 2013-14

2014-

15 2015-16 2016-17

Repayable

yearwise

Nil Nil 5.00

%

7.50% 12.50% 20.00

%

25.00% 30.00%

Opening

Balance

646.48 646.4

8

646.4

8

614.16 565.67 484.86 355.56 193.94

-

-

32.32 48.49 80.81 129.30 161.62 193.94

Closing

Balance

646.48

646.4

614.1

6

565.67 484.86 355.56 193.94

- 22.63

51.72

56.73 58.99

63.03

58.83 41.21 16.00

Interest rate 7% 8% 9% 10% 12% 14% 15% 17%

FITL 22.63 51.72

Restructuring of Working Capital

The existing working capital outstanding as on cutoff date and proposed restructuring thereof is

as follows:-

Stock on hire 8,306.32

50


Repossessed Assets 530.05 Net Current Assets available for DP 8,836.37 Margin (25%) 2,209.09

Drawing Power (Available) 6,627.28 Bank LimitTotal 12,555.63 Overdrawn/Shortfall in DP ( b-a) 5,928.35

As the total outstanding Working Capital loan as on cutoff date is INR 12,555.63 lacs and the

available drawing power is INR 6,627.28 lacs there is a net shortfall of INR 5,928.35 lacs. This

is termed as the irregular portion.

Out of the Irregular Portion 70% shall be converted into Optionally convertible Cumulative redeemable

Preference shares and Balance 30% shall be converted into Working Capital Term Loan in the following

manner:-

OCCPRS

OCCRPS to carry dividend @ 9% p.a.

OCCRPS would have to be issued within 6 months from the date of implementation of the CDR package.

OCCRPS will be issued to the lenders for a period of 8 years to be redeemed in 4 equal annual

installments at a Premium of 3.00% from 2013-14 to 2016-17 in the following manner:

Year Repayment Schedule (OCCRPS of Rs. 4,149.85 lacs)2011-

12

2012-13 2013-14 2014-15 2015-16 2016-17Percentage 25.00% 25.00% 25.00% 25.00%Amount (Rs.

In lacs) (p.a.)

1,037.46 1,037.46 1,037.46 1,037.46

Premium @

3% (P.a.)

31.12 31.12 31.12 31.12Total

Amount1,068.59 1,068.59 1,068.59 1,068.59

51

70% To be converted into – ‘9%

OCCRPS’

4,149.85 30% To be converted into WCTL 1,778.51


WCTL

30% of the irregular portion to be converted into WCTL

Principal payment moratorium up to 30.09.2011.

Repayment in 72 monthly installments commencing from 01.10.11 and ending on 30.09.2017 in the

following manner:-

Repayment Schedule [Working Capital Term loan = Rs 1,778.51 lacs]

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Percentage 5.00% 7.50% 12.50% 20.00% 25.00% 30.00%

Amount (Rs. In lacs) (p.a.) 88.93 133.39 222.31 355.70 444.63 533.55

Working Capital Term loan to carry ballooning interest rate of 7% p.a.in the year 2009-10 which shall be

increased by 1% each year till it reaches a level of 10% in the year 2012-13 after which it shall be

increased by 2% for the year 2013-14 & 2014-15 and again 1% from 2015-15 till it reaches 16.50% in

2016-17 providing an ROI of 10.54% p.a. approx.

Interest From 1.04.2010 to 30.09.2011 (moratorium period) shall be funded through FITL.

Funding of interest accruing from cut off date to 30.09.2011 by converting the same into Funded Interest

Term Loans (FITL)

Funding of interest on Term loan (Secured & Unsecured), Working Capital and Working Capital Term

Loans for 18 months from cutoff date i.e. 1.04.2010 to 30.09.2011 by converting the same into FITL.

Computation of FITL: (Rs lacs)

INTEREST ON: 2009-10 2010 - 11 TOTALTerm Loan 22.63 51.72 74.35Working Capital 662.73 662.73 1,325.46

52


WCTL 124.50 142.28 266.78TOTAL FITL 809.85 856.73 1,666.58

FITL to be repaid in 36 monthly installments commencing from 31.10.11 and ending on 30.09.2014 in

the following manner:-

Year Repayment Schedule [FITL=Rs 1,666.58 lacs]2011-12 2012-13 2013-14

Percentage 10.00% 45.00% 45.00%Amount (Rs. In

lacs) (p.a.)

166.66 749.96 749.96

FITL to carry ballooning interest rate of @ 6% p.a.in the year 2009-10 which shall be increased by 2% in

first year and 1% each year thereafter till it reaches a level of 11% i.e. in the year 2013-14.

Total FITL Calculation

INTEREST ON: 2009-10

(01.04.10-2010 - 11 TOTAL

a Term Loan 22.63 51.72 74.35 c Working Capital 662.73 662.73 1,325.46 d Unpaid interest on TL - - - e WCTL 124.50 142.28 266.78 f Unsecured Term loan - - - TOTAL FITL 809.85 856.73 1,666.58

Allocation of Drawing Power (DP)

The DP was also revised and allocated to each lender in the same contribution as the % share of

each lender in the sanctioned working capital limit (not outstanding WC limit). The remaining

portion of the amount lended was considered to be irregular portion and divided into OCCRPS

and WCTL as per discussed above.

53


Sl.

No Name of the Bank

O/S

WORKI

NG

CAPIT

AL

SANCTI

ONED

WORKI

NG

CAPITA

L

% share

(% of

sanction

ed lt)

DP

allocatio

n

Availabl

e DP

(secured

W.cap)

Irregular

Portion WCTL

OCCR

PS

-

-

-

-

-

-

11 Ing Vysya Bank Ltd

785.85 800.00 6.15%

407.83

407.83

378.02

113.41

264.61

22 YES Bank

1,428.29 1500.00 11.54%

764.69

764.69

663.60

199.08

464.52

33 Bank of India

1,470.55 1500.00 11.54%

764.69

764.69

705.86

211.76

494.10

44 The Federal Bank Ltd

1,261.43 1300.00 10.00%

662.73

662.73

598.70

179.61

419.09

55 Canara Bank

1,214.90 1200.00 9.23%

611.75

611.75

603.15

180.95

422.21

66 State Bank of travancore

962.32 1000.00 7.69%

509.79

509.79

452.53

135.76

316.77

77 Punjab National Bank

930.08 1000.00 7.69%

509.79

509.79

420.29

126.09

294.20

88 UCO Bank

937.78 950.00 7.31%

484.30

484.30

453.48

136.04

317.44

99 Indian Overseas Bank

828.84 900.00 6.92%

458.81

458.81

370.03

111.01

259.02

110 The Dhanalakashmi Bank Ltd

493.41 500.00 3.85%

254.90

254.90

238.51

71.55

166.96

111 State Bank of Hyderabad

469.37 500.00 3.85%

254.90

254.90

214.47

64.34

150.13

112 Bank of Baroda 0.00 0.00%

54


- - - - - -

1 HSBC

942.10 1000.00 7.69%

509.79

509.79

432.31

129.69

302.62

The Catholic Syrian Bank Ltd

812.58 850.00 6.54%

433.32

433.32

379.26

113.78

265.48

TOTAL

12,537.5

0

13,000.00

100.00

%

6,627.28

6,627.28

5,910.22

1,773.07

4,137.1

6

Additional WC funding

The company had a cash loss adjusted of depreciation and provision for impairment to the tune

of INR 1,664 lacs which needs to be financed for the smooth working of the company. The

calculation for the funding amount is shown hereunder.

PAT (2008-09) 6,860.03)

Add Depreciation 66.35

Add Extraordinary provisions Impairment 5,129.54

Cash Loss (1,664.14)

Funding 1,664.14

Promoters Contribution

The promoters also have to infuse in additional funds along with the lenders to compensate for

both the losses and additional current asset build up. It can be seen that the total cost of scheme is

INR 3,364.14 lacs and the lenders are giving INR 1,664.14 lacs. The difference of INR 1,700

lacs is infused by the promoters. This amount contains two component which is explained

further.

55


(Rs. In Lacs)Cost Of scheme AmountCash losses funding 1,664.14 Currrent Asset build up 1,700.00 Total 3,364.14 Means of finance Promoter's contribution/New Investors 1,700.00 Additional Working Capital 1,664.14 Total 3,364.14

In this case the promoters are infusing money in the following manner:

As per the RBI guidelines the promoters has to bring in 15% of the sacrifices by lenders which is

coming out to be INR 404.07 lacs. Sacrifices are the losses to lenders that arise out of reduction

in the rates of interest and rescheduling of installments with effect from the cut-off date.

The remaining amount of promoters’ contribution i.e. INR 1,295.93 lacs which brought in by the

promoters through strategic investors.

56


Financial Viability

Parameters Results Remarks

ROCE 17.04%

5years G-Sec rate

6.04%

Benchmark-2%

above 5 yrs G-sec

rate

Average ROCE is above the benchmark.

DSCR

(adjusted)

1.31

Benchmark 1.25

Adjusted DSCR is above the benchmark rate.

DSCR

(Average)

1.44

Benchmark 1.33

Average DSCR is more than the benchmark rate.

IRR Vs.

CoC

IRR 14.73%

CoC 6.94%

Gap 7.78%

Gap between CoC and IRR is 7.78% which is

above the benchmark. (Benchmark 1.00%)

BEP Operating BEP-

23.53%

Cash BEP 21.37%

Considered for the year 2013-14 which is

optimum year of operation

GP Margin 81.09% Considered for the year 2013-14 which is

optimum year of operation

Loan Life LLR 1.37 Almost in line with the Benchmark rate.

57


Ratio –LLR Bench Mark 1.40

58


Ratio analysis

S.

NO RATIO

2009-10

(Oct'09

to Sept

10) 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

1 EBIDTA Margin 23.97% 38.68% 70.78% 77.78% 81.09% 77.52% 73.23% 68.08%

OPBDT

220.83

%

-

109.45

%

-

49.52% 15.60% 41.32% 55.25% 53.00% 50.25%

2

Net Profit Margin

(PAT / Gross T.O.)

-

113.69

%

-

54.56% 10.15% 31.79% 43.51% 41.69% 39.46% 37.09%

3

Current Ratio

(Including Bank

borrowings in current

Liablities)

1.40

1.47

1.51

1.48

1.40

1.41

1.40

1.38

4

Interest Coverage

Ratio

0.18

0.44

1.28

2.13

3.14

3.16

3.19

3.28

5

Fixed Assets

Coverage Ratio

0.55

0.42

0.43

0.55

0.84

1.09

1.91

#DIV/

0!

6 Debt Equity Ratio

1.64

2.21

1.81

1.15

0.68

0.43

0.20

-

7 Earning Per Share

(17.80)

(4.49)

1.18

4.85

8.16

7.81

7.40

6.95

8 Yearly D.S.C.R. #DIV/0!

(1.79)

1.00

1.12

1.67

2.95

2.52

2.19

9

Average D.S.C.R.(10

years)

1.44

59


10

Average Adjusted

DSCR (7 years)

1.31

11

Return on Capital

Employed -Minimum

17.04%

12

Internal Rate of

Return

14.73%

13 Cost of Capital 6.94%

14

Gap between IRR &

COC

7.78%

15 Loan Life Ratio 1.37

16 Operating BEP Loss Loss 65.26% 35.10% 23.53% 24.74% 26.38% 27.88%

17 Cash BEP Loss Loss 58.96% 31.85% 21.37% 22.53% 24.09% 25.51%

18

(Inventory+receivable

s)/sales 7.79 9.53 5.96 3.63 2.53 2.52 2.52 2.52

Safeguards provided in the scheme

All Terms loans to have first pari-passu charge on fixed assets and second pari-passu charge on

current assets of the Company.

All working capital borrowings to have first pari-passu charge on current assets and second pari-

passu charge on fixed assets of the Company

WCTL and FITL will be secured by Ist pari-passu charge on current and fixed assets of the

Company

Promoters to bring contribution of Rs. 404.07 lacs (15% of sacrifices) towards proposed

restructuring scheme. In addition they would be infusing additional capital through a strategic

investor which will ensure the much needed financial and managerial support.

60


The company shall raise its authorized share capital to Rs 100 crores so that in the event of any

or all lenders deciding to convert the OCCRPS into equity there are no legal constraints.

Appointment of concurrent auditor for periodical monitoring of the Account in terms of CDR

guidelines.

The collateral security shall be available to the lenders to secure their WCTL by way of first

pari-passu charge and to secure other debt by way of second pari-passu charge.

The proposed new promoters shall extend their personal guarantee. They shall also pledge 51%

of the share capital of the company or 100% of their shareholding in favor of lenders, whichever

is low.

Company to open a Trust & Retention Account (TRA) and route all its cash flows through the

account to ensure funds utilization as per the scheme.

Formation of the Monitoring Committee (MC).

Debt servicing has been restructured to provide an Adjusted DSCR of 1.31 providing sufficient

cushion against variability in earnings.

61


: Learnings and Outcomes

The following have been our learning from the above project:

Whenever there is an economic crisis, the rehabilitation of the financial sector is a first order

priority - macroeconomic stability is critical.

The process of CDR followed by a bank and the important factors that have to be considered

before initiating for the restructuring.

Determining of projected financial statements based on key assumptions.

The various guidelines that are mandatory for CDR.

Analysis of viability ratios and the financial statements.

We have also learned the working of CDR Mechanism Cell in India

We have also learned the International Norms of CDR followed in various countries.

62


References

‘Decentralized Creditor-Led Corporate Restructuring Cross-CountryExperience’, Marinela E.

Dado and Daniela Klingebiel

‘Corporate Debt Restructuring in Southeast Asia’, Country Panel IV, Harvard Asia Business

Conference, Feb. 2-3, 2001

‘Corporate Insolvency & Debt Restructuring - Examining the value of Voluntary Administration

‘Informal Work Outs for Corporate Debt Restructuring in Thailand’, Mr. Tumnong Dasri, Bank

of Thailand, Thailand, The Second Forum for Asian Insolvency Reform (FAIR), Bangkok,

Thailand 16 – 17 December 2002

‘Financial and Corporate Restructuring in South Korea’, Bank of Japan Research Papers, June

20, 2003, Hiroshi Akama, Kunihisa Noro, Hiroko Tada

‘Managing Corporate Distress -- Lessons from Asia’, Michael Pomerleano, Lead Financial

Specialist, Financial Sector Development Department, The World Bank October 19, 2000

‘Framework for Corporate Debt Restructuring in Thailand’, The Board of Trade of Thailand

‘Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-

Affiliated Financial Institutions Soften Budget Constraints?’

‘Approaches to Corporate Debt Restructuring in the Wake of Financial Crises’, Thomas Laryea

Ministry of Justice of Thailand, “The Second Forum for Asian Insolvency Reform (FAIR)”,

visited the site on 18th August 2010 at 2140 hrs.

http://cdrindia.org/downloads/readings/CDR%20in%20Thailand-chairman's%20speech.pdf

Master Circular – Disclosure Norm for Financial Institution - 1st July 2009, visited on 22nd

August 2010 at 1256hrs

http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5153

63

http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5153

http://cdrindia.org/downloads/readings/CDR%20in%20Thailand-chairman's%20speech.pdf


Special Regulatory Relaxations for Restructuring - June 30th 2009, visited on 23rd August 2010

1424hrs

http://rbidocs.rbi.org.in/rdocs/Content/PDFs/74MCIR220710_8.pdf

Prudential Guidelines on restructuring of advances – April 17th 2009 – RBI, visited on August

23th 2010 at 1449hrs

http://cdrindia.org/downloads/RBI%20Cirular%20dated%20April%2017%202009.pdf

Annexures

1. Profit And Loss account

Particulars 2003-04 2004-05 2005-06 2006-07April’07

to Sept -082008-09

Net Income 2,587.85 2,761.03 2,887.98 3,578.91 5,658.09 3,075.17

EBIDTA

2,115.12 2,273.70 2,372.07 2,035.61 2,547.48 (4,239.43)

Interest 1,214.52 1,427.71 1,464.39 1,656.13 4,046.44 2,551.47

Depreciation 146.29 76.93 92.79 87.93 213.96 66.35

Operating

Profit/(Loss) 754.31 769.06 814.89 291.55 (1,712.92) (1727.71)

Non operating

Incomes

- - - - - -

64

http://cdrindia.org/downloads/RBI%20Cirular%20dated%20April%2017%202009.pdf

http://rbidocs.rbi.org.in/rdocs/Content/PDFs/74MCIR220710_8.pdf


Non operating exp - - - (930.00) (287.78) 5,129.54

Profit before Tax 754.31 769.06 814.89 (638.45) (2,000.70) (6,857.25)

Tax 288.10 313.89 323.82 16.71 114.63 2.78

Profit after Tax 501.11 534.72 516.73 (656.00) (1,918.07) (6,860.03)

Net Cash Accruals

629.95

571.83

596.69

362.35

(1,514.96)

(1,664.14)

PBIDT to NI (%) 81.73% 82.35% 82.14% 56.88% 45.02% 28.95%

OP to NI (%) 29.15% 27.85% 28.22% -17.84% -35.36% -222.99%

NP to NI (%) 19.36% 19.37% 17.89% -18.33% -33.90% -223.08%

Interest Coverage 1.62 1.54 1.56 1.18 0.58 0.32

2. Projected Cash Flow Statement

Particulars

2009-

10(01.

04.10-

30.09.1

0)

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

(Proje

cted)

(Proje

cted)

(Proje

cted)

(Proje

cted)

(Proje

cted)

(Projec

ted)

(Projec

ted)

(Proje

cted)

Cash Inflows

Cash Accruals

(504.2

8)

(652.0

9)

66.59

210.69

1,087.8

6

1,555.7

1

1,569.0

2

1,576.6

0

65


Increase / Decrease in

share capital

404.07

600.00

250.00

250.00

195.93

-

-

-


CRPS

-

-

-

-

(1,037.

46)

(1,037.

46)

(1,037.

46)

(1,037.

46)


share premium etc.

-

-

-

-

-

-

-

-


Working Capital

(0.00)

1,664.

14

-

-

-

-

-

-


Term Loan

0.00

-

(32.32)

(48.49)

(80.81)

(129.30

)

(161.62

)

(193.9

4)


New Term Loan

-

-

-

-

-

-

-

-


FITL

809.85

856.73

(166.6

6)

(749.9

6)

(749.96

)

-

-

-


WCTL

-

-

(88.93)

(133.3

9)

(222.31

)

(355.70

)

(444.63

)

(533.5

5)


Unsecured Loans

-

-

-

-

-

-

-

-


Current Liabilities

232.58

(149.0

9)

(93.77)

(99.58)

7.92

-

-

-


Provisions

(1,202.

(659.0

(353.7

(189.98

66


525.34 75) 6) 5) ) - - -

Total Inflows

1,467.5

5

1,116.

93

(724.1

5)

(924.4

7)

(988.81

)

33.25

(74.69)

(188.3

6)

Cash Outflows


Gross Block

-

-

-

-

-

-

-

-


capital WIP

-

-

-

-

-

-

-

-


Investments

-

-

-

-

-

-

-

-


Assets on hire

3,611.2

7

306.37

296.94

(1,207.

12)

(764.67

)

-

-

-


Repossessed Assets

(265.0

3)

46.65

10.22

(32.74)

49.49

(50.00)

-

-

Trade Bills purchased

-

-

-

-

-

-

-

-

Bank Balance(with

scheduled bank)

(553.2

0)

747.05

(534.2

5)

499.94

13.73

-

(105.00

)

(225.0

0)


Loans & Advances

(1,150.

00)

-

(500.0

0)

(200.0

0)

(300.00

)

-

-

-


-

-

-

-

-

-

-

67


Other Recievables (75.00)

Total Outflows

1,568.0

4

1,100.

06

(727.0

9)

(939.9

3)

(1,001.

44)

(50.00)

(105.00

)

(225.0

0)

Opening Balance

125.75

25.25

42.12

45.06

60.52

73.15

156.41

186.72


Cash

(100.4

9)

16.87

2.94

15.46

12.63

83.25

30.31

36.64

Closing Balance

25.25

42.12

45.06

60.52

73.15

156.41

186.72

223.36

68

Documents

Cdr Final Project