A Review and Analysis of the CDR Mechanism

The out-of-court approach for corporate debt restructuring (CDR) was
instituted by the Reserve Bank of India (RBI) over a decade ago. While it has
been successful in several cases, there have also been significant shortcomings
with the CDR mechanism.
In a recent
speech
, a Deputy Governor of the RBI undertakes a review of the CDR
mechanism. A number of issues are examined in the speech, including –
– reasons for the large numbers of restructurings;
– excessive leveraging by borrowers, coupled with slowdown in the
economy;
– lack of transparency in the restructuring process;
– the disproportionate burden assumed by the public sector banks;
and
– operation of the moral hazard problem, leading to misuse of the CDR
process by borrowers.
These and other issues, including the way forward are considered in the
speech.

Although the CDR
mechanism, despite its flaws, has helped in turning around companies, any review
efforts can only be piecemeal in nature. The absence of a comprehensive and functional
law on corporate insolvency in India will continue to be sorely felt.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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