Corporate Debt Restructuring (CDR)
Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision.
The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above.
Structure of CDR System
The CDR Mechanism in India stands on the strength of a three-tier structure:
- CDR Standing Forum
- CDR Empowered Group
- CDR Cell
CDR Standing Forum
The top tier of the CDR Mechanism is CDR Standing Forum. It is a representative general body of all Financial Institutions and Banks participating in CDR system. The Forum comprises Chief Executives of All-India Financial institutions and Scheduled Banks and excludes Regional Rural Banks, co-operative banks, and Non-Banking Finance Companies.
It is a self-empowered body which lays down policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and ensures their smooth functioning and adherence to the prescribed time schedules for debt restructuring.
CDR Core Group
The CDR Core Group is carved out of the CDR Standing Forum to assist the Forum in convening the meetings and taking decisions relating to policy, on behalf of the Forum. The Core Group consists of Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI, PNB, Indian Banks Association (IBA) and Deputy Chairman of IBA representing foreign banks in India.
The Core Group lays down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring.
CDR Empowered Group
The second tier of the structure of CDR Mechanism is Empowered Group (EG). The EG in respect of individual cases comprises Executive Director (ED) level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd., State Bank of India as standing members, in addition to ED level representatives of financial institutions (FIs) and banks which have an exposure to the concerned company.
The EG is 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 EG.
The EG decides on the acceptable viability benchmark levels on the following illustrative parameters, which are applied on a case-to-case basis, depending on the merits of each case:
- Debt Service Coverage Ratio
- Break-even Point(Operating & Cash)
- Return on Capital Employed
- Internal Rate of Return
- Cost of Capital
- Loan Life Ratio
- Extent of Sacrifice
Once the final restructuring plan is approved and confirmed by the Empowered Group, CDR Cell issues a Letter of Approval (LOA) for the Restructuring package to all the concerned lenders. The individual lenders are required to sanction the restructuring package within 45 days from the date of issue of LOA and thereafter fully implement it in the next 45 days.
The third tier of the CDR Mechanism is CDR Cell. It is mandated to assist the CDR Standing Forum and the CDR Empowered Group (EG) in all their functions.
The CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers, in terms of the general policies and guidelines approved by the CDR Standing Forum, by calling for details of the proposed restructuring plan and other information and place for consideration of the CDR Empowered Group within 30 days to decide whether restructuring is prima facie feasible.
Trigger to CDR Mechanism
Reference to CDR Mechanism may be triggered by:
- Any or more of the creditors having minimum 20% share in either working capital or term finance, or
- By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.
Categories of CDR
The Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the creditors, will be restructured under this category.
Accounts which are classified as ‘doubtful’ in the books of the creditors would be restructured under this category.