This content is from: Local Insights

Tightening India’s restructuring regime

Veena SivaramakrishnanPooja Yedukumar
Restructuring continues to be the buzz word in India in 2013. It is not just in the context of non-performing assets that banks and financial institutions are seeking to restructure their books. Be it corporate debt restructuring (CDR) or restructuring under the statutory realm of the Board for Industrial and Financial Reconstruction (BIFR), companies seem to be resorting to these methods as an easy means of rehabilitation.

The CDR mechanism is technically voluntary, though most Indian banks (especially in the public sector) are members of the CDR Cell, thereby making it mandatory for them to participate in the restructuring of a company to which they have an exposure in India. The CDR process provides for banks and financial institutions (which are not a party to the Cell) to enforce their rights outside the CDR mechanism. Effectively this allows companies to get some leeway especially from CDR participating banks in relation to their obligations, while continuing to ensure that the rights of the non-participating banks are not adversely affected.

The BIFR, constituted under the Sick Industrial Companies Act, is a statutory set-up mandatorily requiring industrial companies to restructure themselves once their net worth is eroded. The BIFR also contemplates a complete moratorium in India on contractual obligations and enforcement proceedings against the industrial company. In order to avail this protection, there has been a steady increase in the instances where companies are misusing the BIFR forum.

The Indian financial market has been conscious of the increase in companies trying to seek protection under CDR and the BIFR. With this specific background and to avoid misuse, the financial sector regulator, the Reserve Bank of India, has tightened the norms for provisioning to be maintained by banks in their books for such restructured assets. The Indian parliament, on the other hand, has sought to provide the benefits similar to that under the Sick Industrial Companies Act to all companies (as opposed to just industrial companies as is existing under the present norms) under the Companies Bill.

Given these developments, a calculated decision in the prevailing economic climate would need to be taken by banks before agreeing to restructuring in any manner. This could have a direct impact on ensuring that companies use restructuring as a means for rehabilitation and do not seek shelter under the garb of restructuring.

Veena Sivaramakrishnan and Pooja Yedukumar

Instant access to all of our content. Membership Options | One Week Trial