How does the Corporate Debt Restructuring Mechanism work?
It means reorganizing the debt structure of the company. It also has some corporate Debt Restructuring Mechanism to deal. Corporate debt restructuring facilitates also reducing the burden of the debts on the the company by decreasing the rates paid and increasing also the duration of the debt. This in turn increases the potentiality of the company of repay its obligation. Also, some of the debt may waive of their debt in exchange of equity position in the company. A corporate debt restructuring comes into light when a company is facing financial problems or difficulties in repaying its obligation. If the problems are enough to turn a company bankrupt then it can negotiate with the creditors of the company to reduce the burden of debt.
Corporate Debt Restructuring Mechanism
“The objective of the Corporate Debt Restructuring framework is to ensure a timely and transparent mechanism for restructuring of the corporate debts of viable corporate entities affected by internal or external factors”
The Reserve Bank Of India, Notification BP.BC. 15 /21.04.114/2000-01, retrieved on 8th December 2017 , Original Notification by RBI
Corporate Debt Restructuring mechanism is a voluntary non statutory mechanism. It facilitates financial institutions and also banks to restructure or organize the debt structure of company facing financial problems and even bankruptcy problems. Internal or external factors are the cause of financial problem.
The intention of mechanism is to survive from financial problems and also bankruptcy issues. It acts in the interest of the lending institutions and other stakeholders. The Corporate Debt Restructuring mechanism is available to companies who enjoy credit facilities from more than one lending institution. It allows to restructure the debt in a speedy and transparent manner.
Corporate Debt restructuring Mechanism has three tier structure
There are three tier in the structure and they are :
1. CDR standing Forum
There is representative general body of banks and financial institutions engaged in the CDR system. It lays down the policies and guidelines for the time frame within which a unit shall become operational and the minimum level of promoter contribution. It also keep a check on the progress of corporate debt restructuring. The Forum also provides a stage for borrowers and creditors to peacefully advance the policies for the process of debt restructuring. The forum consist of Chairman and Managing Director, Industrial Development Bank of India Ltd; Chairman, State Bank of India; Managing Director and CEO, ICICI Bank Limited; Chairman, Indian Banks’ Association as well as Chairmen and Managing Directors of all banks and financial institutions as permanent members. Most of the big financial institutions in India that lend money to companies are permanent participating members of the standing forum.
CDR Empowered Group
The CDR Empowered Group decides the individual case of corporate debt restructuring. The group consists of Executive director level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd. and State Bank of India as standing members. In addition to executive director level representatives of financial institutions and banks who have an exposure to the concerned company. The standing members conducts the group’s meetings and also voting in proportion to the exposure of the creditors. The Group examine the report of request of restructuring, submitted by CDR cell.
After the Empowered Group decides that restructuring is prima-facie proved and the company is potentially capable in terms pf policies and guidelines. The polices and guidelines made by the standing forum and the restructuring is done by the CDR cell evolved by the Standing Forum, the detailed restructuring package is worked out by the CDR Cell in coordination with the Lead Institution. The institution which has the highest exposure in the concerned company.
The Group examines the credit ability and potential of the company. It approves the restructuring of the company or institution within At least 90 days, or within 180 days from the date on receipt of reference. The CDR Empowered Group decision is final. If the restructuring is realistic and also approves the scheme then the company goes for restructuring. If restructuring is not reasonable then the creditors can take necessary steps for immediate recovery of dues.
CDR Core Group
A CDR Core Group is made to assist the Standing Forum in conducting the meetings and taking decisions relating to policy. The Group consists of Chief Executives of Industrial Development Bank of India Ltd., State Bank of India, ICICI Bank Ltd, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks’ Association and Deputy Chairman of Indian Banks’ Association representing foreign banks in India. CDR Empowered Group and CDR Cell follows policies and guidelines for debt restructuring. It includes policies regarding the operational difficulties faced by the CDR Empowered Group.