[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.]
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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)
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.
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.
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.
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:
others:
1. Absence
of authorisation from the board of the nationalised banks; and
of authorisation from the board of the nationalised banks; and
2. Banks
with smaller exposure chose to settle outside the JLF
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.
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.
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.
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.
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– Nitu Poddar & Vallari Dubey
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