Corporate debt-restructuring

Download Corporate debt-restructuring

Post on 19-May-2015

3.773 views

Category:

Economy & Finance

0 download

Embed Size (px)

TRANSCRIPT

<ul><li> 1. 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 </li></ul><p> 2. Corporate Debt Restructuring 2 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 &amp; 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 3. Corporate Debt Restructuring 3 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 Chapter 8 Live Case Study..................................................................................................................................................24 4. Corporate Debt Restructuring 4 Major Problem Areas ......................................................................................................................................................24 Adverse Effect of reviewing accounting policy ....................................................................................................24 Failure to raise funds through Right Issue.............................................................................................................25 Effect of failure of companys effort for a slump sale of COMAPNY Xs business...................................25 Global Recession and its effect on companys 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.........................................................................................................................................................43 5. Corporate Debt Restructuring 5 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 Indias (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 2. Funding of the interest of both term Loans and Working Capital through FITL 6. Corporate Debt Restructuring 6 3. Additional funding if required 4. Lowering of interest rates 5. 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 banks official. The secondary data will be taken from manuals, circulars etc. from Punjab National Bank, RBI website and CDR Mechanism Cells 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. 7. Corporate...</p>

Recommended

View more >