Modelled on the Corporate Debt Recast Advisory Committee (CDRAC) of the Bank of Thailand, the blue-print of the body is being drafted by MS Verma, special advisor to the Reserve Bank of India. Once put in place, the new body will virtually make the Board for Industrial & Financial Reconstruction (BIFR) redundant as the sick companies will no longer be required to be referred to the board since their debt can be recast through "mutual agreement".

Unlike CDRAC, which is part of the Central Bank of Thailand, or the debt recast body in Korea, part of the president's office, the proposed debt restructuring body will have a "contractual status", sources closely associated with the process of forming the new body told The Financial Express.

At the first stage, there will be an inter-institutional agreement whereby any debt recast proposal acceptable to 60 per cent of the lenders will form the ground rule for any negotiation. "Once the proposal is finalised, it will be binding on the part of the borrowers to accept it. However, the borrowers will have the option of appointing an external consultant to assess the viability of the proposal," sources said. Verma, away in London, was not available for comment.

"It will be difficult to have a legal status for this kind of body. The lenders-debtors agreement will be the backbone of the entire exercise," sources said. The institutions are expected to recast a huge exposure to a greenfield project of one Mumbai-based corporate body as a test case for this exercise. "Most often we see corporates declaring themselves sick and knocking at the doors of BIFR to escape the loan repayments of banks and institutions. The new body will block this path altogether. This will also help banks and institutions to tackle their bloating non-performing assets," said a senior official of a term-lending institution.

The "failure" of the debt recovery tribunals in speedy recovery of cases and a "slack" legal system have prompted banks and institutions to plan setting up the body. "We cannot wait for the formation of asset reconstruction fund (ARF) to take care of bulging NPAs. Something needs to be done on a war-footing and the debt recast body can be the right solution," said another banker.

There have been instances of banks and institutions converting part of debt into equity or even picking up stakes in projects to help promoters complete the projects. However, this is the first instance of a large-scale corporate restructuring from a common platform. Industrial Development Bank of India chairman GP Gupta, who heads the coordinating committee of banks and institutions, is likely to head the new body.