Strategic Debt Restructuring

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Sameer Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur.

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Electrosteel Steels, the first company where the lenders applied RBI’s strategic debt restructuring (SDR) mechanism, is close to finalize the new owners of the company. The Electrosteel Steels’ board in December approved a debt of Rs 2507 crores out of total Rs 10985 crores to be converted into equity. This move will help the lenders work in the direction of minimizing the losses by changing the management of the company.

In June 2015 RBI introduced Strategic Debt Restructuring scheme, which will help banks to work in the direction of recovering their NPA (Non-Performing Assets). Non-Performing Assets are defined as “a debt obligation where the borrower has failed to pay any previously agreed upon interest and principal repayment to the designated lender for an extended period of time” (Source – www.invetopedia.com). As shown in the figure below the GNPA has been increasing since the past few years with a slowdown in GDP growth rate.

GNPA

The SDR scheme should help the banks to recover their loans and control this increase in the GNPA.

This scheme is formed on the general principle that restructuring should be done in such a way that the shareholders must be the first one to face the losses and not the lenders. By allowing to convert debt into equity this scheme compensates the lenders for their losses. Further there are some cases when even the above measure is not successful. There are cases when companies under its current management were not able to revive its condition. At such situation the Strategic Debt Restructuring helps bank to change the management of the defaulter company. This scheme is intended to be the next step when the Corporate Debt Restructuring and other mechanisms fail to achieve the goal.

This scheme can be enacted when the companies fail to achieve necessary milestones under Corporate Debt Restructuring. By enacting this scheme the lending banks may initiate the process of change in management by converting full or a part of debt into equity shares. Such decision of invoking SDR should be approved by the majority of the members of JFL (Joint Lenders’ Forum). In order to achieve the change in ownership the lenders under JFP must hold the majority of equity share after the conversion.

Further details in SDR scheme about the shareholding, share pricing, compliances, etc can be noted from the RBI’s notification of Strategic Debt Restructuring Scheme.

References –

http://www.business-standard.com/article/companies/bankers-finalise-new-owners-for-electrosteel-116012200068_1.html,

https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9767

http://www.mondaq.com/india/x/426592/Financial+Restructuring/Strategic+Debt+Restructuring

https://www.pwc.in/assets/pdfs/publications/2014/growing-npas-in-banks.pdf

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