BACKGROUND

Before India adopted the Insolvency and Bankruptcy Code, 2016 (the 'IBC'), the Reserve Bank of India (the 'RBI') had promulgated a number of interim schemes for the resolution of stressed assets, namely -

  1. Framework for Revitalizing Distressed Assets
  2. Guidelines for Corporate Debt Restructuring (CDR Mechanism)
  3. The Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries
  4. Strategic Debt Restructuring Scheme (SDR)
  5. Prudential Norms on Change in Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme)
  6. Scheme for Sustainable Structuring of Stressed Assets (S4A)

In addition to the above schemes, a Joint Lenders' Forum ('JLF') was also established as an institutional mechanism for overseeing stressed asset negotiations in cases of large consortium loans.1

With the advent of the IBC, the RBI has recently adopted a new framework2 vide Notification3 dated February 12, 2018, which subsumes "the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets." In other words, the above mentioned numerous guidelines of the RBI have been substituted by the revised framework and the JLF shall be discontinued. This framework seeks to rely on the IBC to resolve stressed assets while doing away with the above mentioned interim schemes.

KEY HIGHLIGHTS OF THE NEW FRAMEWORK:

A. Incipient Stress Recognition by Lenders

  1. Early Identification: The RBI has provided for an immediate recognition of 'incipient' stress in loan accounts, immediately on default4 by classifying stressed assets as Special Mention Accounts (the 'SMA') as per the following categories:

    SMA Sub-categories Basis for classification - Principal or interest payment or any other amount wholly or partly overdue between
    SMA - 0 1-30 days
    SMA - 1 31-60 days
    SMA - 2 61-90 days

    It is to be noted that the above classification into the SMAs are the same as provided under Paragraph 2.1 of the Framework for Revitalizing Distressed Assets guidelines of the RBI issued in 2014. However, the old framework also provided for different level of monitoring for accounts classified as different SMAs as listed above. For instance, Individual banks were required to closely monitor the accounts reported as SMA-1 or SMA-0 as these are the early warning signs of weaknesses in the account.
  2. Reporting Requirements: The lenders are required to report the credit information including the SMA classification, as above, to the Central Repository of Information on Large Credits (the 'CRILC'), that has been established under the Framework for Revitalizing Distressed Assets by RBI, on all borrower entities having aggregate exposure of INR 50 million and above with them.

    1. Weekly report - The borrower entities in default (with aggregate exposure of INR 50 million and above) are to be reported weekly to CRILC (at the close of business on every Friday, or the preceding working day if Friday happens to be a holiday), starting from February 23, 2018.
    2. Monthly report – The CRILC-Main Report will now be required to be submitted on a monthly basis from April 1, 2018.

B. The Implementation of a Resolution Plan (The 'RP'):

  1. Implementation of RP: The RBI requires all lenders to put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution, which must be clearly documented even if there is no change in its terms and conditions. This RP may involve any actions / plans / reorganization including, but not limited to,

    1. regularization of the account by payment of all over dues by the borrower entity
    2. sale of the exposures to other entities or investors,
    3. change in ownership, or
    4. restructuring.
  2. Conditions of Deemed Implementation of RP: An RP, shall be deemed to be 'implemented' only if specified conditions are fulfilled, namely, the borrower entity is no longer in default with any of the lenders. If the resolution involves restructuring then all related documentations are completed by the lenders, along with, reflection of new capital structure and/ or changes in the terms of conditions of the existing loans in the books of all the lenders and the borrower.
  3. Independent Credit Evaluation (the 'ICE'): The RPs involving restructuring / change in ownership in respect of large accounts require an ICE of the residual debt5 by credit rating agencies specifically authorized by the RBI. It may be noted that accounts with aggregate exposure of INR 5 billion and above require two (2) ICEs. The ICE is mandatory for even such restructuring(s) carried out before the 'reference date'. It is to be noted that the provision for independent evaluation had already been provided for the "large value restructuring(s)" under the Framework for Revitalising Distressed Assets of the RBI.

C. Referral for Insolvency for Large Accounts:

  1. Timelines: The new framework provides for strict timelines for the initiation of insolvency proceedings. These timelines come into effect from the 'reference date' being March 1, 2018 as follows:

    Default in Accounts with aggregate exposure Reference date and Timeline
    For accounts:
    with an exposure of INR 20 billion or more;
    where resolution may have been initiated under any of the existing schemes;
    classified as restructured standard assets which are currently in respective specified periods (as per the previous guidelines)    		 Reference date: March 1, 2018
    Occurrence of Default Timeline
    On the reference date 180 days from the reference date.
    After the reference date 180 days from the date of first such default
    For other accounts with aggregate exposure of the lenders below INR 20 billion and, at or above INR 1 billion. The RBI intends to announce the reference date(s), over a two-year period, for implementing the RP to ensure calibrated, time-bound resolution of all such accounts in default.

    Note: The prescribed timelines are the upper limits. Lenders are free to file insolvency petitions under the IBC against borrowers even before the expiry of the timelines, or even without attempting an RP outside IBC.
  2. Scenarios for Implementation of RP within timeline above: It is possible that the RP may or may not be implemented within the prescribed timeline(s). Therefore, RBI has clarified the course to be adopted for such situations, accordingly –

    Scenarios Prescription under Framework
    If RP is not implemented within the timeline as above The lenders are obliged to file an insolvency application, either singly or jointly, under the IBC within 15 days from the expiry of the said timeline.
    If RP is implemented within the timeline as above, and, the concerned account is in default at any point of time during the 'specified period'.

    Note: Any default in payment after the expiry of the 'specified period' shall be reckoned as a fresh default for the purpose of this framework.    		 The lenders shall file an insolvency  application, singly or jointly, under the IBC within 15 days from the

D. Prudential Norms:

  1. Ineligibility for Restructuring of Certain Borrowers: The RBI has categorically stated that the borrowers who have committed frauds/ malfeasance/ willful default will remain ineligible for restructuring. However, in case of a borrower-company if the existing promoters/ management are replaced with the new ones such that the former is "totally delinked" from the latter, the lenders may opt for its restructuring "without prejudice to the continuance of any criminal action instituted against the erstwhile promoters/management". It is pointed out that similar provision, which excludes such defaulting borrowing entities, was also provided for under the now defunct Guidelines for Corporate Debt Restructuring by RBI.
  2. Non-compliance Consequences: Any failure in meeting the prescribed timeline(s) or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the RBI, including, but not limited to, higher provisioning on such accounts and monetary penalties.
  3. Disclosure by Lenders: The RBI requires the lenders to disclose the implementation of RPs in their financial statements under the head, "Notes on Accounts", as appropriate. It is to be noted that the RBI has reserved to issue separate detailed guidelines for the same.
  4. Exception to the New Framework: Restructuring in respect of projects under implementation involving deferment of date of commencement of commercial operations (DCCO), to be covered under the extant guidelines contained at paragraph 4.2.15 of the Master Circular dated July 1, 2015 on 'Prudential norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances'.6
  5. Substitution of Extant Schemes / Guidelines: The interim schemes, guidelines and circulars of the RBI have been substituted by the new framework which is provided in Annex-3 of the circular. It is also to be noted that even those accounts that have been invoked under the previous resolution regime but not yet implemented would be governed by the new framework.
  6. Existing Resolution Cases: The RBI has also clarified that the new guidelines will not affect the existing resolution cases such that the lenders must continue to pursue them as per the specific instructions already issued by the RBI to the banks for reference under IBC.
  7. Regulatory Exemptions Noted: The guidelines take into consideration the exemptions provided under the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2009, as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for restructurings carried out as per the regulations issued by the RBI.

CONCLUDING REMARKS:

In the wake of the problem of Non-performing Assets (the 'NPA') within the Indian economy, several initiatives were taken by the RBI through various schemes for dealing with their restructuring. However, the problem persisted and thus, with the coming of the IBC, the revised framework is an attempt by the RBI to ensure a uniform and speedy resolution of stressed assets for the lenders. Therefore, it may be concluded that, with the new regime, the lenders are now precluded from reporting under divergent asset classification norms on the same account since the fragmented and multiplicity of options to lenders under various schemes has now been unified under the new regime. The chances of lenders for interpreting the assets leading to divergence in NPA has also been eliminated by stating that as soon as there is a default in the borrower entity's account with any lender, all lenders either singly or jointly shall initiate steps to cure the default. In other words, as soon as an asset has been marked as stressed by one lender, other lenders must also acknowledge the same and follow the procedure for resolution. Such a provision was absent under the old guidelines since it was mandated that the restructuring plan could only be drawn out by the JLF with specified majority (as under the S4A regime at its Paragraph 7.5, the resolution plan could be put up only when agreed by, at least, 75% of lenders by value and 50% of lenders by number). Thus, the new regime would provide certainty to both lenders and borrowers in respect of resolution of stressed assets and consequences of non-compliances.

Footnotes

1. According to RBI Circular RBI/2013-14/503 dated 26th February, 2014 dealing with "Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)".

2. The guidelines are issued in exercise of powers conferred under Section 35A, 35AA (read with S.O.1435 (E) dated May 5, 2017 issued by the Government of India) and 35AB of the Banking Regulation Act, 1949; and, Section 45(L) of the Reserve Bank of India Act, 1934

3. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/131DBRCEC9D8FEED1C467C9FC15C74D01745A7.PDF

4. 'Default' means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

5. The residual debt of the borrower entity, in this context, means the aggregate debt (fund based as well as nonfund based) envisaged to be held by all the lenders as per the proposed RP.

6. Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015

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