corporate debt-restructuring

Corporate Debt Restructuring at PNB

Submitted To: Prof. Vinay K. Dutta

Submitted By:Ritu Agarwal 91044

Roshan Sonthalia 91045

Saket Kumar Singh 91046

Samarth Gulati 91047

Corporate Debt Restructuring

Acknowledgement

It is our privilege to extend our 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.

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..........................................................................................................................................................5

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

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

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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

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........................................................................................................................................................... 44

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CHAPTER 1 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 corporates 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, orea, 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. One of the main features of the restructuring under CDR system is the provision of two categories of debt restructuring under the CDR system. ccounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the creditors, will be restructured under the first category (Category 1). Accounts which are classified as ‘doubtful’ in the books of the creditors would be restructured under the second category (Category 2).

Throwing lifelines to defaulting companies, banks are giving fresh loans to enable them to pay interest on old loans, and converting working capital outstanding into term loans.

Such deals, better known as evergreening of sticky loans, are being struck by almost all corporates who are taking refuge in the Reserve Bank of India’s (RBI) new norms that allow restructuring of loans. Bankers have a name for such activities: “deep restructuring”.

Close to a few thousand crore of loans are at various stages of such “deep restructuring”. On the bright side, disbursing new money would keep afloat several companies and help banks hide bad loans. But the move could backfire on lenders if borrowers continue to find their fortunes declining.

Typically, while restructuring an account, a bank gives a borrower longer time to repay the loan and, in certain cases, a borrower is given a special dispensation on payment of monthly installments for a fixed period — moratorium period. However, during this moratorium period, the borrower does not require making any payment for the principal component of the loan, but has to pay the interest component.

Under deep restructuring, borrowers are given a loan for making payment of interest component. Such loans are known as ‘funded interest term loan’ (FITL). “This loan is given only to those corporates who may not be in a position to service even the interest component,” pointed out a senior banker from a large commercial bank.

CHARACTERISTICS OF CDR

1. Increasing the moratorium of Loan installments

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2. Funding of the interest of both term Loans and Working Capital through FITL3. Additional funding if required4. Lowering of interest rates5. Conversion of debt into equity and mortgaging the equity with the bank.

OBJECTIVE

The objective is to understand the process of Corporate Debt Restructuring(CDR) and to gain an insight into the various issues involved while considering an organization for the same, compare India with the CDR mechanism that exists world wide and to understand the various steps taking by the banks and other financial institutions involved while doing CDR of an organization.

CHAPTER 2 SOURCES OF DATA

The primary has been collected directly from the interaction with the bank’s official. The secondary data will be taken from manuals, circulars etc. from Punjab National Bank, RBI website and CDR Mechanism Cell’s website.

CHAPTER 3 METHOD OF RESEARCH

The research methodology for the project consists of interviewing of Punjab National Bank Officials, studying the Policy guidelines laid by PNB and RBI in Corporate Debt Restructuring and analyzing the learning from this study on a Live Project which has been already allotted to us.

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CHAPTER 4 LITERATURE REVIEW

Decentralized Creditor-Led Corporate Restructuring Cross-CountryExperience’, Marinela E. Dado and Daniela Klingebiel talks about the CDR mechanism being followed worldwide. According to this paper, internationally, the key objectives of corporate debt restructuring strategies 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 as discussed above. 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.

The CDR approaches that are being followed worldwide can be grouped under three main heads:

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).8 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 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.

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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.

A good CDR mechanism must discourage strategic behavior by creditors and debtors and should not discriminate between foreign and domestic creditors.

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 collective process for voluntary workouts to restructure debts of corporates in distress, while maximizing their value as going concerns. 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, and Thailand, 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.

‘Corporate Insolvency & Debt Restructuring - Examining the value of Voluntary Administration examines the role of Asset Financing Companies (AFCs) in CDR and tries to analyse the importance of such organizations in CDR. According to this paper, Around the world, Asset Management Companies (AMCs) have been used to spearhead the restructuring of corporate debt (with a view to maximizing asset recovery and supporting rehabilitation of viable corporates overtime) as well as to support the recovery of the banking sector (through transferring out bad assets, causing banks to recognize losses and allowing banks to focus on their core business). AMCs have proved relatively more effective in corporate debt restructuring episodes when there are a large number of troubled corporations, relatively homogeneous loans, or where AMCs bring specific restructuring expertise unavailable in the banks.

‘Managing Corporate Distress -- Lessons from Asia’, Michael Pomerleano, Lead Financial Specialist, Financial Sector Development Department, The World Bank October 19, 2000 talks about a few CDR cases in Asia.

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The Case of Korea: Chaebol restructuring program involves the following:

Commitment by the chaebol to improve transparency and corporate governance in general, through the adoption of international accounting standards, the adoption of combined financial statements, the appointment of external directors to corporate boards, and strengthening of shareholders rights

Eliminating cross debt payment guarantees among subsidiaries; Improving the financial structure of the conglomerates, through the lowering of debt-

equity ratios (the Korean government set the upper limit at 200%), the liquidation of unprofitable businesses and assets;

Concentrating on core businesses; Strengthening the accountability of controlling shareholders and managers; in particular,

controlling shareholders committed to place their personal wealth into recapitalization and loan guarantees.

‘Framework for Corporate Debt Restructuring in Thailand’, The Board of Trade of Thailand discusses the CDR mechanism being followed in Thailand. According to this paper, Corporate Corporate Debt Restructuring Advisory Committee (CDRAC) was set up in June 1998 to encourage debt restructuring process. Framework for Corporate Debt Restructuring in Thailand was approved in August 1998. BOT established Office for Corporate Debt

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Restructuring in December 1998 to closely monitor the progress of debt restructuring. DCA/ICA and SA help promote debt restructuring, Set clear procedure and time frame for debt restructuring cases, Target group of debtors to enter to corporate debt restructuring process and Set up dispute settlement procedure.

In order to urge debt restructuring process, the Debtor- Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) were signed. DCA and ICA were used for debt restructuring cases with multiple creditors. A Simplified Agreement (SA) was established for the cases with less creditors or single creditor. ‘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

CHAPTER 5 UNDERSTANDING CDR

RECOVERY MECHANISM

Banks in past were never so serious in their efforts to ensure timely recovery and consequent reduction of Non Performing Assets (NPA’s) as they are today. This is because of the modern, complex, competitive market conditions that are making banks to undertake this step. It is important to remember that recovery management, be of fresh loans or old loans, is central to NPA management. This management process needs to start at the loan initiating stage itself. Effective management of recovery and NPA comprise two pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality.

Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time.

DEBT RECOVERY PROCESS

Debt recovery processes can be typically of following kinds, each involving different procedure:

NORMAL RECOVERY PROCEDURE

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As mentioned above, this procedure will generally apply to the debtors who are willing to pay the dues with normal recovery process. Based on the above-mentioned regulatory guidelines, following procedure may be outlined for such recovery. However the recovery agents should follow the bank-specific debt recovery procedure as advised by their principal. Below are given the main rules for making telephone calls and visit to the debtor for recovery of dues:

1) The recovery agent has been authorized by the bank to collect the past due debt from the particular customer.

2) The customer has been notified by the bank of the details of the recovery agent for collection of the past-due debt.

3) Making customer calls: This is the first step in recovery procedure.

DIFFICULT RECOVERY PROCESS

It is the recovery process where the debtors are not willing to pay and who intentionally resist or avoid recovery efforts. The recovery agent has to follow special process of recovery against the recalcitrant defaulters, in consultation with the bank.

Assets possession process

If the recalcitrant debtors do not eventually pay the dues, the movable assets charged to the bank by way of hypothecation or pledge, can be possessed by the bank or the recovery agent and thereafter auctioned or otherwise sold to recover the dues. The detailed procedure for such recovery is discussed later, after explaining the meaning of pledge, hypothecation etc.

Legal recovery process

The intervention of the court is required to possess mortgaged immovable property by the bank or its recovery agent. Also if the charged assets do not exist, or the debt is unsecured, the debtor will have to be sued for recovery of the dues by the bank/recovery agent

1. Giving notice to borrowers

While written communication, telephonic reminders or visits by the bank’s representatives to the borrowers’ place or residence will be used as loan follow up measures, the bank will not initiate any legal or other recovery measures including repossession of the security without giving due notice in writing. The Bank will follow all such procedures as required under law for recovery /repossession of security.

2. Repossession of Security

Repossession of security is aimed at recovery of dues and not to deprive the borrower of the property. The recovery process through repossession of security will involve repossession, valuation of security and realization of security through appropriate means. All these would be

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carried out in a fair and transparent manner. Repossession will be done only after issuing the notice as detailed above. Due process of law will be followed while taking repossession of the property

3. Valuation and Sale of Property

Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair and transparent manner. The bank will have right to recover from the borrower the balance due, if any, after sale of property. Excess amount, if any, obtained on sale of property will be returned to the borrower after meeting all the related expenses provided the bank is not having any other claim against the borrower.

4. Opportunity for the borrower to take back the security

The bank resorts to repossession of security only for the purpose of realization of its dues as the last resort and not with intention of depriving the borrower of the property. Accordingly, the bank will be willing to consider handing over possession of property to the borrower any time after repossession but before concluding sale transaction of the property, provided the bank dues are paid in full. If satisfied with the genuineness of borrower’s inability to pay the loan installments as per the schedule which resulted in the repossession of security, the bank may consider handing over the property after receiving the installments in arrears

MODES OF RECOVERY

1) Assignment/Sale Of Decrees

Assignment/Sale of Decree can be adopted as a measure of recovery in those cases where borrowers do not pay decreed amount in terms of decree in maximum one Year’s time.

Transfer/Sale of Financial Assets to Securitizations Companies/Reconstruction Companies

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) provides also for sale of financial assets (NPAs) by banks / FIs to Asset Reconstruction Companies (ARCs).Financial assets would be offered for transfer / sale to only those Securitization Company/ Reconstruction Company who has / have obtained the Certificate of Registration from RBI under Section 3 of the SARFAESI Act. Only those NPAs, to which provisions of the SARFAESI Act are applicable, shall be considered for sale.

2) Engagement Of Recovery Agencies

Various Banks including Private/ Foreign and Nationalized Banks have been outsourcing the job of recovery in small NPA accounts through Recovery Agents by payment of nominal fee to resolve small NPAs, where multiple complexities are involved i.e. borrowers in scattered areas, recalcitrant borrowers, advances having no collateral security/guarantee, hindrances in

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repayment due to local leaders etc. Bank’s policy in this regard provides that NPA accounts(whether non-suit filed, suit filed or decreed) with ledger outstanding up to Rs. 10 lakh are eligible under the scheme, except accounts where compromises have been approved (including those reached at in Lok Adalats) and have not been treated as failed. Moreover, written off accounts can also be entrusted to Recovery Agencies to effect recovery.

3) One Time Settlement:

Resolution of Non Performing Assets through one-time settlement (OTS) has been recognized asan effective non-legal remedy by the Bank due to twin advantages of faster recovery of dues andincome generation by recycling of funds otherwise likely to be blocked for a long time. One timesettlement of dues refers to a negotiated settlement under which the bank endeavors to recovermaximum amount within least possible time, with least possible expenses.

4) Recovery camps

In case of accounts under small segment the platform of Recovery Camps be used by the field functionaries with proper spade work. For on the spot decision on One Time Settlement proposals received in such recovery camps, participation of officials from controlling offices is advisable.

5) Write Off:

When all recovery measures have failed to yield any result, there is no primary/collateral security and means of borrower/ repaying capacity are negligible/remote Bank may be left with no option but to write off such advances. Recovery efforts should be continued even in the written off accounts.

IMPORTANCE OF CDR

Banks involved in extended FITL loans fear that if the corporate defaults post restructuring, RBI is unlikely to issue a similar scheme on restructuring in the near future. A default will increase the ratio of bad loans and force banks to make higher provisions, which means lower profitability.

At the same time, few bankers do not think there is anything unusual about FITL. “The only difference is that banks are more active in giving such loans now as compared to anytime in the past. The RBI rule says that banks have to make full provisions for FITL, which goes to indicate that RBI is aware of such practices in the banking system,” said a senior banker.

However, to avert provisions on FITL, some banks are carving out working capital loans into term loans. A borrower’s drawing limits on working capital loans are linked to receivables and inventories. But, in the case of term loans, the borrowing need not be backed by inventories. This helps even the borrowers with poor inventory position to tap bank funds for the shorter-term.

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Following the global meltdown, not only have receivables come down, inventory valuations have also dipped. This means that a borrower’s drawing limits too would fall in the same proportion. Hence, banks are converting a portion of working capital limits into term loans . This gives the borrower more flexibility in accessing the loan. For banks, it prevents accounts from turning bad.

Meanwhile, banks have received huge response under the special dispensation on restructuring of loans. Under the scheme, the RBI has said that if a bank restructures a loan which is a standard loan as on September 1, ‘08 it can continue to classify it as standard asset, even after restructuring the loan.

This means that if client is regular in his payments to banks as on September 1 ‘08 but may be on the verge of defaulting in subsequent months, this account could be restructured and banks can continue to classify it as standard asset.

Banks have to make provisioning on bad loans as well on restructured loans. However, as per this scheme, if an account is restructured well in time, banks can prevent it from slipping into a bad loan category and thereby make lower provisions.

PRESENT STATUS OF CDR CASES

CDR Mechanism should not be seen as a stigma by the corporate and sufficient time should be devoted on analyzing and assessing the basic viability of the projects, said Shri Nirmal Gangwal, Founder and Managing Director, Brescon Corporate Advisors Limited. Thousands of firms suffer due to deadlock between banks and clients due to asset classification problems at the first restructuring stage. It is more important to recover principal than the interest and there should be flexibility in interest rates for CDR cases, he further informed.

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

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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.

1. 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.

2. The unit becomes viable in 10 years, if it is engaged in infrastructure activities and in 7 years in the case of other units.

3. 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.

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

5. Personal Guarantee is offered by the promoter except when the unit is affected by the external factors pertaining to the economy and industry,

6. The restructuring under consideration is not a repeated restructuring.

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CHAPTER 6 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:

1. CDR Standing Forum and its Core Group2. CDR Empowered Group3. 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 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

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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 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

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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.

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

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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:

i. 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.

ii. 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.

19


CHAPTER 7 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.

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

20


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 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

21


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 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

22


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.

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.

23


CHAPTER 8 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:

1. 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.

2. 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.

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

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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.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

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

25


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 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:

1. The sector analysis in which the Company X is operating and study the demand supply analysis and growth in the considered industry.

2. 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

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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

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%

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

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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%

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

28


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):

TERM LENDERS CDR

FIs Sanctioned Repayment O/S

Ing Vysya Bank 2,500.00 TL 2,108.22 391.78

DCB 800.00 TL 703.25 96.75

ICICI Bank 5,884.26 USL 5,850.55 33.71

Total 6684.26 8,662.02 522.24

WORKING CAPITAL LENDERS (CDR)

Name of the Bank Sanctioned Limit Outstanding As on 31.03.10

Punjab 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 900.00 828.84

Bank of India 1,500.00 1,470.55

The Federal Bank Ltd 1,300.00 1,261.43

State Bank of Hyderabad 500.00 469.37

29


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

Tamilnadu Industrial Corporation Ltd 1,000.00 254.70

Total 1,000.00 254.70

Working Capital Lenders

The Catholic Syrian Bank Ltd 850.00 835.01

HSBC 1,000.00

Total 1,850.00 1,772.81

Central Electronics 78.18

Fullerton 652.71

Grand Total 730.89

RESTRUCTURING 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 13.484

Bank of Baroda (WC) 15.36 9.216 6.144

Development Credit bank Ltd 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 31 st March 2010 is as follows:

Sno. Banks Amount30


1. 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

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

646.48 646.48 646.48 614.16 565.67 484.86 355.56 193.94

- -

32.32 48.49 80.81 129.30 161.62 193.94

Closing Balance

646.48 646.48

614.16 565.67 484.86 355.56 193.94 -

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

31


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

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 Limit

Total 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

a) OCCRPS to carry dividend @ 9% p.a.b) OCCRPS would have to be issued within 6 months from the date of implementation of the

CDR package.c) 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:

YearRepayment Schedule (OCCRPS of Rs. 4,149.85 lacs)

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

Percentage 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 @ 31.12 31.12 31.12 31.12

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70% To be converted into – ‘9% 4,149.85

30% To be converted into WCTL 1,778.51


Total Amount

1,068.59 1,068.59 1,068.59 1,068.59

WCTL

a) 30% of the irregular portion to be converted into WCTLb) Principal payment moratorium up to 30.09.2011.c) Repayment in 72 monthly installments commencing from 01.10.11 and ending on 30.09.2017

in the following manner:-

Year

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

d) 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.

e) 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)

a. 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.

b. Computation of FITL: (Rs lacs)

INTEREST ON: 2009-10 2010 - 11 TOTAL

Term Loan 22.63 51.72 74.35

Working Capital 662.73 662.73 1,325.46

WCTL 124.50 142.28 266.78

TOTAL FITL 809.85 856.73 1,666.58

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c. 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.

Sl.No Name of the Bank

O/S WORKING CAPITAL

SANCTIONED WORKING CAPITAL

% share (% of sanctioned lt)

DP allocation

Available DP (secured W.cap)

Irregular Portion WCTL

OCCRPS

-

-

-

-

-

-

34


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%

-

-

-

-

-

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 12,537.50

13,000.00

100.00%

6,627.28

6,627.28

5,910.22

1,773.07

4,137.16

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.

35


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.

(Rs. In Lacs)

Cost Of scheme Amount

Cash 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:

1. 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.

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

36


37


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 Ratio –LLR

LLR 1.37

Bench Mark 1.40

Almost in line with the Benchmark rate.

38


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%

OPBDT220.83%

-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

10

Average Adjusted DSCR (7 years)

1.31

11 Return on Capital 17.04%

39


Employed -Minimum

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+receivables)/sales 7.79 9.53 5.96 3.63 2.53 2.52 2.52 2.52

SAFEGUARDS PROVIDED IN THE SCHEME

1. All Terms loans to have first pari-passu charge on fixed assets and second pari-passu charge on current assets of the Company.

2. All working capital borrowings to have first pari-passu charge on current assets and second pari-passu charge on fixed assets of the Company

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

4. 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.

5. 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.

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

7. 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.

8. 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.

9. 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.

40


10. Formation of the Monitoring Committee (MC).11. Debt servicing has been restructured to provide an Adjusted DSCR of 1.31 providing

sufficient cushion against variability in earnings.

41


CHAPTER 9 : 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.

42


CHAPTER 10 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 1256hrshttp://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5153

Special Regulatory Relaxations for Restructuring - June 30th 2009, visited on 23rd August 2010 1424hrshttp://rbidocs.rbi.org.in/rdocs/Content/PDFs/74MCIR220710_8.pdf

Prudential Guidelines on restructuring of advances – April 17 th 2009 – RBI, visited on August 23th 2010 at 1449hrshttp://cdrindia.org/downloads/RBI%20Cirular%20dated%20April%2017%202009.pdf

43

http://cdrindia.org/downloads/RBI%20Cirular%20dated%20April%2017%202009.pdf

http://rbidocs.rbi.org.in/rdocs/Content/PDFs/74MCIR220710_8.pdf

http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5153

http://cdrindia.org/downloads/readings/CDR%20in%20Thailand-chairman's%20speech.pdf

http://cdrindia.org/downloads/readings/CDR%20in%20Thailand-chairman's%20speech.pdf


CHAPTER 11 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

- - - - - -

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

44


2. Projected Cash Flow Statement

Particulars

2009-10(01.04.10-30.09.

10)2010-

112011-

122012-

132013-

142014-

152015-

162016-

17

(Projected)

(Projected)

(Projected)

(Projected)

(Projected)

(Projected)

(Projected)

(Projected)

Cash Inflows

Cash Accruals

(504.28)

(652.09)

66.59

210.69

1,087.86

1,555.71

1,569.02

1,576.60

Increase / Decrease in share capital

404.07

600.00

250.00

250.00

195.93

-

-

-

Increase / Decrease in CRPS

-

-

-

-

(1,037.46)

(1,037.46)

(1,037.46)

(1,037.46)

Increase / Decrease in share premium etc.

-

-

-

-

-

-

-

-

Increase / Decrease in Working Capital

(0.00)

1,664.14

-

-

-

-

-

-

Increase / Decrease in Term Loan

0.00

-

(32.32)

(48.49)

(80.81)

(129.30)

(161.62)

(193.94)

Increase / Decrease in New Term Loan

-

-

-

-

-

-

-

-

Increase / Decrease in FITL

809.85

856.73

(166.66)

(749.96)

(749.96)

-

-

-

Increase / Decrease in WCTL

-

-

(88.93)

(133.39)

(222.31)

(355.70)

(444.63)

(533.55)

Increase / Decrease in

45


Unsecured Loans - - - - - - - -

Increase / Decrease in Current Liabilities

232.58

(149.09)

(93.77)

(99.58)

7.92

-

-

-

Increase / Decrease in Provisions

525.34

(1,202.75)

(659.06)

(353.75)

(189.98)

-

-

-

Total Inflows

1,467.55

1,116.93

(724.15)

(924.47)

(988.81)

33.25

(74.69)

(188.36)

Cash Outflows

Increase / Decrease in Gross Block

-

-

-

-

-

-

-

-

Increase / Decrease in capital WIP

-

-

-

-

-

-

-

-

Increase / Decrease in Investments

-

-

-

-

-

-

-

-

Increase / Decrease in Assets on hire

3,611.27

306.37

296.94

(1,207.12)

(764.67)

-

-

-

Increase / Decrease in Repossessed Assets

(265.03)

46.65

10.22

(32.74)

49.49

(50.00)

-

-

Trade Bills purchased -

-

-

-

-

-

-

-

Bank Balance(with scheduled bank)

(553.20)

747.05

(534.25)

499.94

13.73

-

(105.00)

(225.00)

Increase / Decrease in Loans & Advances

(1,150.00)

-

(500.00)

(200.00)

(300.00)

-

-

-

Increase / Decrease in Other Recievables

(75.00)

-

-

-

-

-

-

-

Total Outflows

46


1,568.04

1,100.06

(727.09)

(939.93)

(1,001.44) (50.00)

(105.00)

(225.00)

Opening Balance 125.75

25.25

42.12

45.06

60.52

73.15

156.41

186.72

Increase / Decrease in Cash

(100.49)

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

47

corporate debt-restructuring

Economy & Finance

debt recovery process

corporate debt restructuring

cdr mechanism

recovery mechanism

table of contents chapter

modes of recovery

difficult recovery process

cdr empowered group