Corporate Debt Restructuring (CDR) Mechanism was evolved by Reserve Bank of India (RBI), and detailed guidelines were first issued in 2001 for implementation by banks. The CDR Mechanism covers only multiple banking accounts, syndication/ consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs. 100 million and above. It is a voluntary non-statutory system based on Debtor-Creditor Agreement and Inter-Creditor Agreement and the principle of approvals by majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision.
CDR system is based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). DCA and ICA provide the legal basis to the CDR mechanism. The debtors have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to CDR Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum have to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the System through laid-down policies and guidelines. Lenders and other third parties who have not joined the CDR system, could join CDR mechanism of a particular corporate by signing transaction to transaction ICA, wherever they have exposure to such corporate, if permitted by RBI. RBI has now permitted transaction to transaction membership to ARCs, NBFCs, State Level Institutions and Co-operative Banks.
Structure & Constitution of CDR
The CDR Mechanism is a three-tier structure:
- CDR Standing Forum-CDR Core Group
- CDR Empowered Group
- CDR Cell
The CDR System consists of the CDR Standing Forum, the CDR Core Group, the CDR Empowered Group and CDR Cell, which are non-profit body in terms of RBI guidelines for implementing the CDR System.
The CDR Core Group is carved out of the CDR Standing Forum to assist the Forum in convening the meetings and taking decisions relating to policy, on behalf of the Forum. The Core Group consists of Chief Executives of IDBI, SBI, ICICI Bank, BOB, BOI, PNB, Indian Banks Association (IBA) and Deputy Chairman of IBA representing foreign banks in India.
The Core Group lays down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring. The guidelines also suitably address operational difficulties experienced in the functioning of the CDR Empowered Group. The CDR Core Group also decides on the modalities for enforcement of the time frame. The Core Group also lays down guidelines to ensure that over-optimistic projections are not assumed while preparing/approving restructuring proposals especially with regard to capacity utilization, price of products, profit margin, demand, availability of raw materials, input-output ratio and likely impact of imports/international cost competitiveness.
Reference to the CDR Cell
A reference for corporate debt restructuring may be made to the CDR Cell in such form as may be prescribed by the CDR Core Group, by:
- A Lender or a group of Lenders having at least 20% share in the total Principal Outstanding Financial Assistance, in either working capital or term finance, to the Eligible Borrower (A corporate borrower having multiple lenders and aggregate exposure of Rs. 100 million and above.); or
- The Eligible Borrower with the prior consent of a lender or group of Lenders having at least 20% share in the Principal Outstanding Financial Assistance, in either working capital or term finance, granted by Lenders to the Eligible Borrower or
- Joint Lender’s Forum (JLF) opting to refer the account to the CDR after a decision to restructure is taken in accordance with the RBI Guidelines through the Lead Institution
Procedure under the CDR System
The Referring Lender or JLF, shall prepare the preliminary Restructuring Scheme and forward the same to the CDR Cell. The CDR Cell shall, after receipt of the preliminary Restructuring Scheme prepare a Restructuring Scheme in terms of the general policies and guidelines approved by the CDR Standing Forum and submit the same to the CDR Empowered Group for taking a view on the prima facie feasibility of the said scheme, within thirty days from the date of receipt of Reference.
In case of CDR Empowered Group holds that restructuring of the Eligible Borrower is prima facie feasible or where JLF had arrived at a decision regarding the preliminary viability of restructuring the CDR Cell shall proceed with the preparation of a detailed Restructuring Scheme with the assistance of the Referring Lender, Lead Institution, JLF and the Eligible Borrower.
The CDR Cell shall finalise the detailed Restructuring Scheme and submit the same to the CDR Empowered Group for its examination and approval. The CDR Empowered Group may on due consideration make such modifications as it may consider necessary and shall take a decision in the matter.
The CDR Cell shall communicate the decisions of the CDR Empowered Group to the Lenders and the Eligible Borrower. Wherever Additional Finance, if any, is envisaged in the Approved Restructuring Scheme, the same shall be provided on pro-rata basis by all the Lenders to the Eligible Borrower, whose account is classified as standard or sub-standard.
A Decision of the CDR Empowered Group relating to prima facie feasibility and/or final approval of a Restructuring Scheme shall be taken by a Super-Majority Vote at a duly convened meeting, after giving reasonable notice, to the Lenders and to the Eligible Borrower.
Super-Majority Vote means the vote cast in favour of a proposal by not less than 60% by number and not less than 75% by value of the aggregate principal outstanding.
Appeal to the CDR Core Group
An appeal against the decisions of the CDR Empowered Group shall lie to the CDR Core Group. The appeal shall be preferred within a period of 15 days from the date of receipt of letter of the CDR Cell communicating the decision of the CDR Empowered Group and shall contain the grounds on which the decision of CDR Empowered Group is challenged.
Implementation and Monitoring of Restructuring Schemes
The CDR Empowered Group may constitute through CDR Cell, a Monitoring Committee to oversee the due implementation of the Approved Restructuring Scheme. The Monitoring Committee shall also be empowered to discuss and resolve outstanding issues, if any, within the framework of the Approved Restructuring Scheme and in case any variation/modification to the Approved Restructuring Scheme is felt necessary, the same shall be referred to the CDR Empowered Group for approval. The Monitoring Committee, will meet every month and if necessary more frequently till the package is implemented and thereafter once in three months. The Monitoring Institution shall report the progress of implementation of the Approved Restructuring Scheme to the CDR Cell on monthly basis. In case of any difficulty in implementation of the Approved Restructuring Scheme, the Monitoring Committee may approach the CDR Empowered Group for necessary direction and/or guidance. In case of any difference in respect of interpretation of the Approved Restructuring Scheme, the decision of the CDR Empowered Group shall be final and binding on the concerned parties.
The CDR Cell in consultation with the Monitoring Institution and/or the members of the Monitoring Committee may place a review note/status note before CDR Empowered Group with regard to status of implementation of the package, operational performance, security creation and compliance of terms and conditions of approval by the concerned Lenders/Eligible Borrower.