Corporate Debt Restructuring in India
Despite of best intentions and efforts, corporate find themselves in financial difficulty because of factors beyond their control or due to internal reasons. The trigger for difficulty might be an unstable macro-economic environment or changes in government policy or regulation or due to an incorrect strategic decision or problems within the company. If a company goes down, it takes an entire ecosystem of creditors, distributors, employees, customers, etc down with it. So at times, for the revival of corporate and for the safety of the money lent by 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 endeavours.
Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a 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.
CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The accounts where recovery suits have been filed by the creditors against the company, may be eligible for consideration under the CDR system provided, there is approval by at least 75% of the creditors (by value) and 60% of creditors (by number). The same would be binding on the remaining creditors.
Under the CDR system, there is provision of two categories for debt restructuring:
Category 1: Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the creditors, are restructured under the first category
Category 2: Accounts which are