Strategic Debt Restructuring (SDR) Scheme

With mounting NPAs, Reserve Bank of India had introduced Strategic Debt restructuring (SDR) scheme in June 2015 to let banks recover their loans from the ailing companies. It lets the Joint Lenders Forum (JLF) or simply the consortium of lenders to convert a part of their loan in an ailing company into equity. The SDR scheme will provide more power to the banks in managing the loan defaulted company so that they can recover their dues.

Key Facts: Features of SDR scheme

Some important features of the SDR scheme are:

• Under this scheme, banks are made as majority owners and they will replace the existing management of the ailing company. It gives banks the power to turnaround the ailing company into a financially viable one and recover their dues by selling the company to a new promoter.
• JLF would be responsible for taking a decision on invoking SDR by converting whole/part of the loan into equity shares. The decision made has to be approved by the majority of the JLF members.
• JLF should hold at least 51% of the equity shares of the ailing company.
• If the banks adopt SDR scheme for recovering bad loans then they claim significant relaxation from the RBI rules for 18 months. For instance, they can report lower NPAs and higher profits for 18 months.
• Loans restructured under the SDR scheme will not be treated as a non-performing asset (NPA).
• Under this scheme, banks can recognise the interest accrued but not due/paid as income.
• If the banks are not able to sell the company to a new promoter within 18 months, then all the regulatory relaxations will cease to apply and the loan will be treated as an NPA. This would significantly impact the profitability of the banks.

Questions and Answers

• What is JLF? What are the options available for the JLF’s while restructuring a loan?
• What are the criticisms of the scheme?
• What is the way forward?

What is JLF? What are the options available for the JLF’s while restructuring a loan?

JLF is a committee of bankers who have given loans to a stressed borrower. JLF can be constituted if the borrower has not paid any money in the last 60 days (Special Mention Account2). The JLF have the following options when a loan is restructured:

• Transfer equity of the company by promoters to the lenders to compensate for their sacrifices.
• Infuse more equity into the companies.
• Transfer the holdings of the promoters’ to a security or an escrow arrangement till turnaround of company.

What are the criticisms of the scheme?

A section of Experts criticize that the scheme is not effective in recovering the bad loans. This is mainly due to the inability of the lenders to sell their stakes in the ailing companies within the 18 month time period. Either they are not able to sell or they are made to sell at steep losses. Religare Institutional Research after analyzing 15 SDR cases has opined that the scheme increases the risk of postponing the NPAs to the later years. It has said that it expects more SDR to fail and has deferred an estimated Rs 1.5 lakh crore of NPA formation to later years. The scepticism stems from the fact that most of the SDR cases are already stressed for last two years.

Secondly, when banks proceed to sell their stakes at the end of 18 month window, the debt of companies would have already increased. This coupled with crash in commodity prices and weak private investment makes the prospect of attracting new promoter difficult for the banks.

Thirdly, most SDR cases falls in risky sectors such as metals, power and capital goods. Expecting a promoter to buy 51% stake in an ailing company belonging to this sector is not realistic.

Fourthly, the time span of 18 months is too short for the banks to wrap up the entire process of initiating, running the business and finding a buyer.

Fifthly, unless banks are sure of a sale, they cannot take the SDR route. For some reasons if the banks fail to find a buyer, then it has to provide for the asset over the past 3-4 years in a single quarter. This would adversely affect the profitability of the banks.

Sixthly, SDR rules do not allow partial stake sale and mandates that the banks have to sell their entire stake in the company to the new buyer. However, in some cases banks hold more than 51% stake (example IVRCL-78%). In such cases finding buyers to buy such a large stake will be difficult.

Lastly, in most of the cases banks are currently using the existing managements to run the company. They just do external monitoring and oversight. This has not yielded any significant improvement in the finances of the company and partially results in the failure of the SDR scheme.

What is the way forward?

As RBI wants to clean the books of the banks by March 2017, it has to relook the effectiveness of the schemes it has introduced like SDR. The problems the banks face has to be immediately addressed. In order to make SDR mechanism successful, another way forward is to persuade SEBI to give exemption for the new promoter from open offer. As per the SEBI rules, the new promoter after acquiring 51% stake from the banks have to make an open offer for a further 25% stake. If the open offer is fully subscribed, then the holding of the buyer will be above 75%. In such cases, the new promoter has to delist the company. This needs to be changed.