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STRATEGIC DEBT RESTRUCTURING SCHEME

STRATEGIC DEBT RESTRUCTURING SCHEME

Over the last six months, the Indian banking sector has been witnessing a rather novel experiment, with leading banks turning into majority owners and gaining management control of as many as 16 troubled companies in order to recover their loans worth over  81000 cr.  Banks have taken recourse to the Strategic Debt Restructuring (SDR) scheme, put together by the RBI last Jun, wherein a consortium of lenders converts a part of their loan in an ailing company into equity, with the consortium owing at least 51 per cent strake.

Loans restructured under the scheme are not treated as non-performing assets (NPAs) and banks have to make low provisions of 5 percent in most cases.  The  scheme allows banks to recognize interest accrued, but not due/ paid as income.  This enables banks to report lower NPAs and higher profits for 18 months.

     SDR is a new tool made available to banks and financial institutions by the RBI in Jun 2015 for the recovery of non-performing assets (NPAs).  The joint lenders  forum (JLF), a consortium of bankers and financial institutions, can take the SDR route to recover the loan extended to the company.  The SDR scheme aims to revive stressed companies and provide an option to the JLF to initiate change of management in companies which fail to achieve the milestones under Corporate Debt Restructuring (CDR).  The JLF acquires the majority stake in the company by converting a part of the outstanding loan into equity.  At a later date, it transfers the control to a new promoter who has the ability to turn around the company.

     By making banks majority owners and replacing the existing management, the scheme gives lenders the powers to turn around the ailing company, make it financially viable and recover their dues by selling the firm to a new promoter.  If banks are unable to sell a new promoter within 18 months, then all regulatory relaxations cease to exist and lenders have to treat these assets as NPAs and make 100 per cent provisioning for these assets in majority for these assets in majority of the cases.

    Under the SDR scheme, banks are exempted from making an open offer while acquiring majority stake in a stressed company.  But such exemption is not available to the new promoter, who may have to delist the company.

    The SDR scheme succeeds only if the company is turned around.  Turning around requires disciplined approach and board effectiveness in its oversight function.

    The new law per se might not be of much help to lenders as is evident from the fact that loans to listed companies, which are mandated to adopt strict corporate governance norms prescribed by the Securities and Exchange Board of India (SEBI), turn into NPA.  Banks and financial institutions must enhance skills to assess business risks.  They must ensure that the new promoter adopts good corporate governance practices in true spirit.


STRATEGIC DEBT RESTRUCTURING SCHEME Reviewed by sambasivan srinivasan on 9:22:00 PM Rating: 5

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