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CDR Definition The reorganization of a company's outstanding obligations, often achieved by reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. This allows a company to increase its ability to meet the obligations. Also, some of the debt may be forgiven by creditors in exchange for an equity position in the company.

Genesis of CDR Mechanism in India There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of 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 countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.200 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of

standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.

Types of Cases registered under the CDR System Category I The Category I CDR system is applicable to accounts, which are classified as 'standard' and 'sub-standard'. There may be a situation where a small portion of debt by a bank might be classified as doubtful. In that situation, if the account has been classified as ‘standard’/ ‘substandard’ in the books of at least 90% of lenders (by value), the same would be treated as standard/ substandard, only for the purpose of judging the account as eligible for CDR, in the books of the remaining 10% of lenders.

Category II There have been instances where the projects have been found to be viable by the lenders but the accounts could not be taken up for restructuring under the CDR system as they fell under ‘doubtful’ category. Hence, second category of CDR would be there for cases where the accounts have been classified as ‘doubtful’ in the books of the lenders, and if a minimum of 75% of creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the account and consent for such restructuring, subject to the following conditions: (i) It will not be binding on the creditors to take up additional financing worked out under the debt restructuring package and the decision to lend or not to lend will depend on each bank/FI separately. In other words, under the second category of the CDR mechanism, the existing loans will only be restructured and it would be up to the promoter to firm up additional

financing arrangement with new or existing creditors individually. (ii) All other norms under the CDR mechanism such as the standstill clause, asset classification status during the pendency of restructuring under CDR, etc., will continue to be applicable to this category also.

Membership of CDR System CDR Mechanism can be joined by all the banks and financial institutions. It can also be joined by Non Banking Finance Companies (NBFCs), Asset reconstruction Companies (ARCs), State Level Institutions (SLIs) and Co-Operative Banks on transaction-specific basis.

Legal basis of CDR

The legal individual basis to cases the CDR of corporate System is debt provided restructuring by the Debtor-Creditor are decided by Agreement the CDR (DCA) and the Empowered Group Inter-Creditor (EG), which Agreement is the (ICA). secondAlltier banks of the /financial structure institutions of CDRin the CDR System Mechanism in India. are required The EG in to respect enter into of the individual legally cases binding comprises ICA withExecutive necessary enforcement Director (ED) and level penal representatives provisions. of Industrial The most Development important Bank part of ofIndia the Ltd., CDR Mechanism ICICI Bank which Ltd., State is theBank critical of India element as of standing ICA ismembers, the provision in addition that if 75% to EDof creditors level representatives (by value) agree of financial to a debt institutions restructuring (FIs) package, and banks the which same would have anbe binding onto exposure thethe remaining concerned creditors. company. The Boards of all institutions/banks authorize their Chief Executive Officers and/or Executive Directors to decide on Similarly, debtors are required to execute the DCA, either at the time of reference the restructuring package in respect of cases referred to the CDR system, with the to CDR Cell or at the time of original loan documentation (for future cases). The requisite requirements to meet the control need DCA has a legally binding ‘stand still’ agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to ‘stand still’ and commit themselves not to take recourse While the Standing to any legal Members actionofduring EG facilitate the period.the‘Stand conduct Still’ofis the necessary Group’s for enabling the meetings, voting CDRisSystem in proportion to undertake to the the exposure necessary and debt number restructuring of the concerned exercise without only. lenders any outside In order intervention, to make thejudicial Empowered or otherwise. Group However, effective and the ‘stand broad-based still’ is applicable and operate only efficiently to any civil andaction, smoothly, eitherthe by the participating borrower or institutions any lenderand against banks the other party, approve a panel and does of senior not cover officers any to criminal represent action. them in the CDR EG and ensure that they depute officials only from among the panel to attend the meetings of Besides, the borrower needs to undertake that during the ‘stand still’ period the EG. The representative have general authorization by the Boards of the documents will stand extended for the purpose of limitation and that he would not participating FIs/banks to take decisions on behalf of their organizations approach any other authority for any relief and the directors of the company will regarding restructuring of debts of individual corporates. not resign from the Board of Directors during the ‘stand still’ period. The EG considers the preliminary Flash Report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the EG decides that restructuring of a company’s debts is prima facie feasible and the concerned Structure of CDR System enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum, detailed restructuring package worked out by of theareferring The edifice of thethe CDR Mechanism in India standsison the strength three-tier institution structure: in conjunction with the CDR Cell. However, if the referring institution/bank faces difficulties in working out the detailed restructuring CDR Standing Forum package, the participating institutions/banks decide upon the alternate financial institution/bank CDR Empoweredwhich Groupwould work out the detailed restructuring package at the first meeting of the EG when the Flash Report comes up for discussion. CDR Cell

CDR The EGStanding is mandated Forum to look into each case of debt restructuring, examine the viability and rehabilitation potential of the company and approve the restructuring The CDRwithin Standing Forum,time the frame top tier package a specified of of 90 the days,CDR or atMechanism best within in 180India, days isof a reference to the EG. The EG decides on the acceptable viability benchmark levels on the following illustrative parameters, which are applied on a case-to-case basis, depending on the merits of each case:

· Debt Service Coverage Ratio · Break-even Point(Operating & Cash) · Return on Capital Employed · Internal Rate of Return · Cost of Capital · Loan Life Ratio · Extent of Sacrifice The EG meets on two occasions to discuss (Flash and Final Report) in respect of each borrower account. This provides an opportunity to the participating members to seek proper authorization from their CEO/ED, in case of need, in respect of those cases where the critical parameters of restructuring are beyond the authority delegated to him/her. Having regard to the varied features of the borrower-corporates and their promoters/sponsors, they are classified into four categories for the purpose of stipulation of conditions. Borrower Class – A comprises companies affected by external factors pertaining to economy and industry. Class –B borrowers are such corporates/promoters who, besides being affected by the external factors, also have weak resources, inadequate vision and do not have support of professional management. Class-C borrowers are overambitious who have diversified into related/unrelated fields with/without lenders’ permission and those classified in Class-D are financially undisciplined borrowers. The categorization of borrowers is decided by the EG after ensuring that all conditions being stipulated have been discussed with the borrower concerned by the referring institution. The decisions of the EG are final. If restructuring of debt is found to be viable and feasible and approved by the EG, the company is put on the restructuring mode. If restructuring is not found viable, then the creditors are free to take necessary steps for immediate recovery of dues and/or liquidation or winding up of the company, collectively or individually.

CDR Cell The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to assist the CDR Standing Forum and the CDR Empowered Group (EG) in all