Revitalising Distressed Assets Through the Joint Lenders Forum

[The following post is contributed by Dhanush. M, a 4th year studnent at the
Jindal Global law School]
rapid growth of non-performing assets (NPAs), especially with regard to public sector
banks (PSBs) is a major hurdle to the sustenance of the banking system. This
prompted the Reserve Bank of India (RBI) to issue a paper in early 2014 titled “Framework ForRevitalising Distressed Assets and Their Restructuring” for early
detection, rectification and restructuring of stressed accounts under Special Mention
Account (SMA) category.
The categorisation
of the SMA account was as follows: (i) “SMA-0”, where principal or interest
payment has not been overdue for more than 30 days but the account has been
showing incipient stress; (ii) “SMA-1” where principal or interest payment from
an account is overdue between 31-60 days; and (iii) “SMA-2” where principal or
interest payment is overdue between 61-90 days.
RBI has
set up the Central Repository of Information on Large Credits (CRILC) to
collect, store and disseminate data on all borrowers’ credit exposures
including SMAs having aggregate fund and non-fund based exposure of Rs. 50
million or more. RBI has advised the banks that if an account is reported by
any of the lenders to CRILC as SMA-2, they should mandatorily form a committee
to be called Joint Lenders’ Forum (JLF) if the aggregate exposure (AE) (fund based
and non-fund based taken together) of lenders in that account is Rs 1000
million and above.
Strucutre of a JLF
The formation
of a JLF will be mandatory in accounts having AE of Rs.1000 million and above;
in other cases also the lenders will have to monitor the asset quality closely
and take corrective action for effective resolution as deemed appropriate.
The lender with the highest AE will convene the JLF at the earliest and
facilitate exchange of credit information on the account. In case there are
multiple consortium of lenders for a borrower (e.g. separate consortium for
working capital and term loans), the lender with the highest AE will convene
the JLF.
It is
mandated that all the lenders should formulate and sign an Agreement
incorporating the broad rules for the functioning of the JLF. The Indian Banks’
Association (IBA) has prepared a Master JLF agreement and operational guidelines
for JLF which can be adopted by all lenders.
may explore various options through the Corrective Action Alan (CAP) to resolve
the stress in the accounts. The first option may involve rectification, by obtaining
a specific commitment from the borrower to regularise the account so that the
account comes out of SMA status or does not slip into the NPA category.
second option may involve the possibility of restructuring the account if it is
prima facie viable and the borrower is not a wilful defaulter. Restructuring an
account would involve a commitment from promoters for extending their personal
guarantees along with their net worth statement supported by copies of legal
titles to assets may be obtained along with a declaration that they would not
undertake any transaction that would alienate assets without the permission of
the JLF.
effectuate restructuring, the lenders in the JLF may sign an Inter Creditor
Agreement (ICA) and also require the borrower to sign the Debtor Creditor
Agreement (DCA) which would provide the legal basis for any restructuring
process. A “stand-still” clause popularly referred to as a “moratorium” could
be stipulated in the DCA to enable a smooth process of restructuring.
“stand-still” clause does not mean that the borrower is precluded from making
payments to the lenders, but prohibits the parties from taking recourse to any
other legal action during the “stand-still” period. This would be necessary to
undertake the necessary debt restructuring exercise without any outside
intervention, judicial or otherwise. The ICA may also stipulate that both
secured and unsecured creditors need to agree to the final resolution.
third option could involve the JLF deciding the most preferred recovery process
to be followed, among the various legal and other recovery options available,
with a view to optimising the efforts and results.
decisions agreed upon by a minimum of 75% of creditors by value and 60% of
creditors by number in the JLF would be considered as the basis for proceeding
with the restructuring of the account, which will be binding on all lenders
under the terms of the ICA. However, if the JLF decides to proceed with
recovery, the minimum criteria for binding decision, if any, under any relevant
laws/Acts would be applicable.
would consider the possibility of transferring equity of the company held by
promoters to the lenders to compensate for their sacrifices, promoters infusing
more equity into their companies, or transfer of the promoters’ holdings to a
security trustee or an escrow arrangement until turnaround of company. This
will enable a change in management control, should lenders favour it, where the
loan of the distressed company is being restructured.

In case
a borrower has undertaken diversification or expansion of the activities which
has resulted in the stress on the core-business of the group, a clause for sale
of non-core assets or other assets may be stipulated as a condition for
restructuring the account, if under the Techno Economic Viability (TEV) study,
which provides appraisal of technological parameters of a project and its
impact on the financial viability of project,  the account is likely to become viable on
hiving-off of non-core activities and other assets.
abovementioned method of “out-of-court” debt restructuring popularly referred
to as the “London approach” is beneficial to the extent that it is able to
save  transaction costs, particularly
litigation costs involved in a case of restructuring by the court. However,
there is a possibility of coordination problems between various lenders owing
to their differing interests, which may delay the formation of a CAP at the
earliest as in the instance ofdebt-laden Bhushan Steel, which had outstanding loans amounting to
40,000 crore, where there were several reports in the media as to the
reluctance of certain private lenders in taking part in the revival plan.
Also, when
dealing with the JLF, the bank can act in manner that caters to its short-term
interests, as the JLF is required to arrive at an agreement on the option to be
adopted for CAP within 30 days from the date of an account being reported as
SMA-2 by one or more lenders.

should sign off the detailed final CAP within the next 30 days from the date of
arriving at such an agreement. Therefore, it is recommended that the time
period for the CAP be increased from 30 days as banks have to be very cautious
when they are take an incremental exposure to stressed companies.
funding is infused in a restructuring proposal and accorded priority status
over other creditors, there is a strong possibility of legal complications
arising when the original creditors have stipulated negative pledges as per the terms of the
original loan agreement. The law in regard to negative pledge is that any later
perfecting secured party would accordingly be subordinate to the negative
pledgee, just as a later perfected secured party is subordinate to a prior one.
With regard
to unsecured creditors like bondholders, restructuring by the JLF would
adversely affect their interests as there is a risk that secured creditors
would infuse more capital in distressed unviable firms, as secured creditors
would stand to gain a from seeing a firm continuing as a “going concern”
relative to the liquidation proceedings.

in a scenario where a firm has defaulted on its bonds and its accounts are
stressed but the JLF infuses more capital, then such actions would be
considered invalid in law as the Bombay High in the case of  M/s. Asian Power Controls Ltd. V/s. Mrs. Bubbles Goyal
categorically stated that the only right an unsecured creditor has is seeking
the winding up of the company and the law itself clearly says that merely
because all the assets of the company are secured in favour of secured creditors,
it is no ground to refuse winding up.
Due to
the abovementioned reasons, there is a strong possibility that the JLF method
of restructuring distressed assets may end up being very litigious.
ensure that the lenders committee reaches early consensus, the JLF decision
threshold should be revised to 60% in terms of value and 51% in terms of number
as against the Framework’s 75% by value and 60% by number. To deal with any
bondholder holdouts for restructuring of a company, the RBI may consider the
possibility of inserting `Collective Action Clauses` which enables qualified
majority of consent to bind other bondholders legally.
if any lender does not participate in the meetings, the said lender should not
be considered in the consensus estimation, and should attract a negative
supervisory view. This would reduce the problem of banks “holding out” and
speed up the process.
tax breaks, in the form of exemptions from capital gains tax on hiving off
non-core assets should be provided to promoters that initiate rectification
under the SMA classification, as defined by the RBI, at the first signs of
incipient stress. To resolve the legal complications associated with negative
pledges when new funding is infused in a restructuring proposal, it is recommended
that the JLF use arrangements such as transferring assets into new
special-purpose vehicle companies or by the creditors “acquiring” assets either
in the traditional sense or through repurchase structures.
Indian companies structure their investments through several related parties and
subsidiaries. Therefore, the JLF needs to effectively scrutinize huge
investments are undertaken in step down subsidiaries and related parties by a
multi-tier structure. It is recommended that where investments in associates
and subsidiaries are more than 25% of the net worth, while appraising the term
loan / working capital requirements of the parent company, the detailed
analysis of financials of associates and subsidiaries must be undertaken.
restructuring of a distressed enterprise hinges greatly on the commitment of
the board of directors to turnaround an enterprise. It is recommended that
promoters and directors should not be permitted to float new ventures or take
directorship in other companies. This must be a condition under debtor creditor
regard to a “change in management” by the JLF, it would extremely difficult to
implement management change, where promoters have controlled the management for
a significant period of time. It is recommended that the JLF should consider
taking assistance of specialised management agencies that can take over the
companies that have productive assets and keep the assets in running condition.
conclude by stating that early recognition of distressed assets would go a long
way in solving the chronic problem of NPAs, but it is important to do so in a
manner where the views of the relevant stakeholders are considered in a
democratic fashion.

Dhanush. M

[1] The concept of SMA
category serves as a medium for early detection of stress in an account unlike
the Non-Performing asset (NPA) model of monitoring stress, wherein banks only question
the stress in an account
where interest on a loan and/ or
instalment of principal remained overdue for a period of more than 90 days in
respect of a term loan
[2] Master
Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning
pertaining to Advances (Available at (
[3] Master
Circular, as above.

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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