In the new scheme of things, promoters of companies seeking easier repayment terms through a corporate debt restructuring (CDR) package will have to fork out 25% of the diminution in the fair value of the restructured account and not 15% as they do now. Moreover, they will have to pledge 100% of their shares and furnish unconditional personal guarantees. These are the decisions of the core group of the CDR cell, which comprises chairmen and managing directors (CMDs) of top public sector banks and CEOs of private lenders.
In all, 17 new norms have been finalised, making recasts more stringent, including those for sanction of additional working capital, in which case the promoter must bring in 10-25% of the amount.
The norms come ahead of RBIs rules on recast, which will be based on the Mahapatra Committees recommendations and are expected next month. The central banks rules will be applicable to both bilateral and CDR cell recasts. The panel, among other things, wants promoters to make a bigger sacrifice of around 15% of the fall in fair value or 2% of the restructured amount, whichever is higher.
The RBI group also feels that any conversion of loans into preference shares should be done only as a last resort. Besides, this conversion of loan into preference shares must be capped at around 10%, it feels. The committee also wants banks to reclassify restructured loans as non-performing assets after two years, besides making promoter guarantees mandatory.
Promoters of companies in trouble due to the tough environment, rather than mismanagement, were earlier exempted from giving personal guarantees. However, bankers are now talking tough and are unlikely to convert loans into optionally convertible cumulative preference shares, except under exceptional circumstances.
The CDR core group has also decided that the lead banker be given the authority to appoint new directors to the boards of stressed companies, if necessary.
Bankers will also be more strict about companies achieving financial targets after a restructuring exercise. Henceforth, the concessional rate of interest offered in the CDR package cannot be lower than the base rate. The core group also decided that the stressed companies must open a Trust and Retention account through which all receivables and payments are routed.
The account, similar to a current account, will be operated by one of the lead banks and will help track cash flows, a banker said. As part of the CDR package, the main banker (or monitoring committee) generally approves a cash budget that stressed companies are advised to stick to.
Loans worth a whopping R52,000 crore have been referred to the CDR cell between April and November this year and that is after R50,000-crore debt having been recast in the first six months of the year. Several large companies have asked for lenient terms after their businesses turned weaker. These include Hotel Leela, Bharti Shipyard, GTL and HCC. According to an ICRA report, the standard restructured advances could move up to R3.74.2 lakh crore or 6.5%-7.5% of advances by March 31, 2013 as against R2.3 lakh crore as on March 31, 2012.