Tuesday, May 16, 2017

Reforms to Restructuring Plans Under the Joint Lenders’ Forum

[The following post is contributed by Nitu Poddar, Practicing Company Secretary, and Vallari Dubey, Executive, at Vinod Kothari & Co. They can be reached at nitu@vinodkothari.com and vallari@vinodkothari.com respectively.]

The Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) work on the principle of identifying the stress in a borrower entity and curing it at its nascent stage. The intent is to preserve the “economic value” of the underlying assets against the loan extended by financial creditor.

The Reserve Bank of India (RBI) on May 5, 2017 rolled out an Amendment Notification to the “Framework for Revitalising Distressed Assets in the Economy – Guidelines on JLF and CAP” originally put to effect on and from April 1, 2014.

Decrease in the quantitative criteria for passing a resolution

By the Amendment Notification, the majority required for approval of any resolution plan in the JLF has been decreased to 60% of creditors by value and 50% of creditors by number thereby relaxing the quantitative criteria required to approve a restructuring plan. Prior to the Amendment Notification, decisions under JLF mechanism required the consent of 75% creditors by value and 60% by number for the purpose of restructuring of accounts of stressed assets under the guidelines. However, by virtue of the latest Amendment Notification, it seems that the resolution process will be facilitated with relative ease and that the approvals may be sought and plans be implemented in a speedier manner.

Similar to the previous situation, such resolution or restructuring plan, once approved, will be binding on all lenders irrespective of the vote cast by them. However, the Amendment Notification allows a bank to exit from the decision approved by the JLF, by selling its loan to another JLF member (referred to as “exit by substitution”) within the time stipulated in the JLF framework. If the bank is unable to firm up its decision within such stipulated time, than the decision of the JLF shall be binding on such bank as well and it will have to abide by the same.

Board of Banks to provide adequate authority and mandate for implementation of JLF decisions

To curb the lethargic practice of the banks not providing adequate authority to their representatives, which proves to be an impediment in the entire restructuring process, the Amendment Notification specifically provides that henceforth lenders shall ensure that their representatives in the JLF are equipped with appropriate mandates and the employees with adequate powers to implement the JLF decision without any further powers required from the lender’s board.

Unlike before, the Amendment Notification clearly mentions that the stand of the participating banks while voting cannot be ambiguous and / or conditional. The same must be voted and accepted “as approved” without any conditionalities, which means that  lenders’ concerns have to be sorted or taken into cognizance during the preparation of the restructuring plan before it reaches the stage of voting.

Additional mode of a restructuring plan

The Amendment Notification provides that the restructuring plan under JLF can now include flexible structuring of loans, change of ownership under strategic debt restructuring (SDR), and the latest RBI framework on Scheme for Sustainable Structuring of Stressed Assets (S4A), etc.

The conventional mode of restructuring was either via the corporate debt restructuring (CDR) route or, in cases outside CDR, by carrying out the detailed Techno-Economic Viability (TEV) study.

Penalty on delay in implementation

In spite of specific timelines clearly provided in the RBI Notifications, within which lenders have to decide and implement the CAP, delays have been observed in finalisation and implementation of the CAP, leading to delays in resolution of stressed assets in the banking system. The track records of the all the JLFs formed in the country is evidence of how long the matters linger in the name of preparation and implementation of the restructuring plan in a stressed company.

In an attempt to put rest to all the lackadaisical attitude of the banks, the Amendment Notification in a sufficiently strict language directs the lenders to “scrupulously” adhere to the timelines of the framework, failing which, in addition to the disincentives, in the form of asset classification and accelerated provisioning, monetary penalties shall also be levied on the lender in accordance with the Banking Regulation Act.

Difference between JLF and the Insolvency and Bankruptcy Code, 2013 (IBC)

CAP seeks to offer three options for the purpose of resolution, namely, (i) rectification, (ii) restructuring and (iii) recovery. Noticeably, recovery has been considered as the last resort here.

What makes this action plan different from the resolution process under IBC is that the IBC is in form of a Code, specifically framed and passed as an Act of Parliament, while CAP is enunciated as part of RBI guidelines. For obvious reasons, the IBC will have a wider scope and far reaching implications on resolution proceedings. It is also interesting to note that the IBC extends its span to include operational creditors within its scope.

Further to this, the IBC has set specific timelines to dispose of applications and resolution process, given its intent to resolve the matters in a time bound manner. On the other hand, even though CAP has specific timelines to be followed, delays have been noticed by the RBI in finalising and implementing CAP.

Reasons for delay in case of CAP

The reasons for delay are, among others:

1.         Absence of authorisation from the board of the nationalised banks; and  

2.         Banks with smaller exposure chose to settle outside the JLF

Decisions under IBC are taken by committee of creditors by a vote of 75% of the voting power. In case of JLF, now the decisions shall be taken by 60% of creditors by value and 50% of creditors by number.

Patently, the JLF guidelines are applicable for lending under Consortium and Multiple Banking Arrangements (MBA), except for certain specific guidelines which shall apply to all cases of lending. On the other hand, the IBC is applicable to all types of creditors – both financial and operational.

The guidelines operate more as a set of instructions that the lenders under consortium or MBA and/or banks as individual lenders have to follow. Differently, resolution under IBC is not instructions but a treatment for both the creditors and corporate debtors. While the RBI guidelines for CAP are focused towards revitalising stressed assets, the IBC is a one stop forum for all types of resolution.


- Nitu Poddar & Vallari Dubey

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